Revenue & Customs Commissioners v DCC Holdings (UK) Ltd (2010)
The appellant (D) appealed against a decision ((2009) EWCA Civ 1165, (2010) STC 80) that it was not entitled to relief in respect of a non-trading deficit in relation to of a series of net-paying "repo" transactions. D had entered into the transactions with a bank, the bank selling gilts to D and re-purchasing them for £27 million less than the purchase price paid by D. D held the gilts for 18.5 days and received interest of £28.8 million, recording the figure of £1.8 million on its profit and loss account. It claimed a non-trading deficit of £27 million, on the basis that it had made a loan relationship loss of £28.8 million less £1.8 million. It was agreed that the transactions could give rise to a taxable interest under three actual or notional loan transactions, and the issue was what debits and credits were to be brought into account for D for (i) the actual loan transaction between the UK government and the holder of the gilts; (ii) the loan transaction deemed to exist under the Income and Corporation Taxes Act 1988 s.730A between D as lender and the bank as borrower; and (iii) the loan transaction deemed to exist under s.737A(5) of the 1988 Act and theFinance Act 1996 s.97(2) and s.97(4). The parties agreed that the second loan relationship created a credit to D of £1.8m, but reached no agreement as to the credit in the first or the debit in the third. The Court of Appeal decided that both the credit and the debit were £28.8 million.
The Supreme Court upheld, though by applying different reasoning, a Court of Appeal decision that a series of "repo" transactions, under which the interest received by the purchaser was in excess of the amount that it had paid, did not give rise to an entitlement in the purchaser to relief in respect of a non-trading deficit.
The provisions in s.730A, s.730B, s.737A, s.737B and s.737C of the 1988 Act were an extension to existing anti-avoidance provisions and were intended to make the tax treatment of repos correspond to their economic substance. The 1996 Act effected a fundamental change in the taxation of loan interest for the purposes of corporation tax aimed at bringing the tax treatment of all interest onto an authorised basis of accounting which, in the instant case, was an accruals basis. It was reasonable to expect that, in enacting that legislation, Parliament intended to preserve the essentials of the earlier provisions. The resolution of the appeal depended on the correct interpretation and interrelation of s.730A(2) and s.737A(5) of the 1988 Act and s.84(1), s.97(2) and s.92(4) of the 1996 Act. In particular, the question was how far the words in s.84(1) "the sums which, in accordance with an authorised accounting method and when taken together, fairly represent..." could be stretched in order to avoid the absurd result of D's deemed income receipt in respect of the coupon being different from its deemed interest payment as a borrower. The interest received by the holder was intended to be cancelled out by the holder's payment to the seller, so the holder was taxed on the repo transaction as if it had made a secured loan at interest, and the gilts interest was taxed as the income of the seller. Under s.737A(5) of the 1988 Act, D was to be supposed to make a payment on the last day of the repo period "representative" of the interest accrued during that period. It was to be treated as interest under a new, hypothetical relationship between D and an unidentified creditor. When dealing with a deeming provision it was important not to take the hypothesis therein further than was warranted. In treating the payment as accruing during the 18-day repo period, the Court of Appeal overlooked the fact that s.84(1) of the 1996 Act, as applied to deemed interest bys.730A(6)(b) of the 1988 Act, required the uniform application of an accruals basis. On such a basis, only a small part of the gilts interest had accrued during the repo period. The assumption that the hypothetical loan relationship lasted no longer than the repo period was unwarranted. The payment was representative of a gilts coupon which accrued during a six-month period, though D's interest in it lasted for only 18.5 days. Under s.84(1) the concern was to identify the sums fairly representing the interest on D's actual and hypothetical loan relationships. If the credit from an actual relationship under which D was a creditor was a time-apportioned sum, the debit under a hypothetical relationship under which D was a debtor had also to be a time-apportioned sum, with the apportionment carried out in the same way, otherwise the requirement of fair representation could not be satisfied. On the accruals basis both the credit and the debit should be £2.9m, the former by a simple process of time-apportionment of the coupon, the latter by a corresponding time-apportionment of D's notional payment representative of the coupon (see paras 6-7, 25-26, 33, 41-42 of judgment).