DCC Holdings (UK) Ltd v Revenue & Customs Commissioners (2008)
The court considered the effect and application of the Finance Act 1996 s.84, s.85 and s.97 in relation to the treatment for taxation purposes of net paying sale and repurchase agreements between companies and concerning gilts.
The appellant company (D) appealed against a special commissioner's decision (DCC Holdings (UK) Ltd v Revenue and Customs Commissioners (2007) STC (SCD) 592) upholding the respondent Revenue's amendment of its corporation tax return to reduce its non-trade deficits. D had entered into sale and repurchase agreements (repos) with a bank (X), buying gilts from, then reselling them to, X at a fixed price. It received the interest on the gilts while it held them, and the repurchase price was reduced by a corresponding amount. Though the difference between the price paid and the price charged by D for the gilts was £27 million, it had received coupon payments of £28.8 million, so made an economic profit of £1.8 million. D claimed a loss of £27 million for corporation tax purposes. The special commissioner determined that D had made a profit of £1.8 million. The issues were (i) whether, having regard to the hypotheses on which D was to be taxed, there was any question of it having to give credit for the £28.8 million; and (ii) if D was a party to the loan relationship represented by the gilts, what credit and debits it was required to bring into account.
(1) D had argued that under the Finance Act 1996 it never became a party to the loan relationships, and did not have to give credit for the coupon receivable by the owner of the gilts because it had to be assumed that it was not the owner. That position, however, involved reading Sch.9 para.15 of the Act as if it directed an assumption that there was no acquisition or disposal, when the only assumption was that any disposal or acquisition was not a "related transaction". The assumption was that the identified transaction was not a taxable event, not that there was no transaction. Therefore D was to be treated as having acquired the gilts, but it was not liable to bring into account gains simply arising on their acquisition and disposal. (2) The special commissioner was wrong to conclude that no credit needed to be given. Taxing provisions were not necessarily aimed at economic profit, so the Act had to be consulted to see what was allowable. A transaction relating to a loan relationship was charged to tax. The gilts owned by D were loan relationships within the meaning of s.81, and gains from them were to be computed in accordance with s.82 using the credits and debits provided for by s.84. The sum of £2.9 million fairly represented the cash receipt arising from the £28.8 million gain, that being the portion of the coupon attributable to D's period of ownership of the gilts, and there being no debits arising to D which, under the accruals method, had to be brought into account. The reference in s.85 to an authorised accounting method was a reference to the method by which particular sums were brought into account in each accounting period. It was not a reference to authorised accounting methods or normal accountancy practice generally. The taxing scheme proceeded on the footing that D owned the gilts, and the accruals method had to be applied on that basis. Section 84 required that the debits and credits to be brought into account should be those in accordance with an authorised accounting method, and should fairly represent the gains arising from the loan relationships. It did not say that they must fairly represent the profits, nor that they could be created in order to produce a fair representation; nor did it introduce some free-floating concept of fairness by reference to which the tax charge was made, Odeon Associated Theatres Ltd v Jones (1971) 1 WLR 442 Ch D applied and Mangin v Inland Revenue Commissioners (1971) AC 739 PC (NZ) considered. (3) D was also party to two deemed loan relationships by reason of the Income and Corporation Taxes Act 1988 s.730A, and s.97 of the 1996 Act. Under the deemed loan of the sale price by D, £1.8 million was to be credited. X's sale of the gilts occurred in the same accounting period as the deemed payment of the deemed interest on the repurchase date, so on the accruals method the whole would be entered in the account and D would be taxed as if it had received £1.8 million. The deemed manufactured interest was to be treated as an interest payment by D on the repurchase date. The sum of £28.8 million would, under the accruals method, fairly represent the gains or losses under the deemed loan relationship. That was the amount of the deemed interest and could not relate to any period other that of the repo transaction. That began and ended in the same accounting period, so the accruals method did not require it to be apportioned over any other period. A debit of £28.8 million had therefore to be entered in the computation. Section 97 did not create a freestanding debit to which s.84 was irrelevant; both sections formed part of an overall scheme. There was no basis for thinking that Parliament intended interest to be notionally payable in respect of a period when there was no relationship between D and X. The deemed manufactured interest was an entirely fictional sum and was not the coupon in some other guise so as to make the coupon period more relevant than the repo period. Accordingly, the appeal was allowed and a loss of £24.1 million entered into D's corporation tax computation.