This case concerns a tax avoidance scheme by which the appellant taxpayer, then called Teesside Power Limited (“TPL”) and subsequently renamed GDF Suez Teesside Limited, sought to reduce its potential liability to United Kingdom corporation tax (“CT”) in respect of contingent and unrealised, but nevertheless very valuable, claims which it had against certain companies in the insolvent Enron Group. When the relevant transactions were entered into, between December 2006 and March 2007, the open market value of the unrealised claims is agreed to have been approximately £200 million, but in accordance with UK generally accepted accounting practice (or “GAAP”) the claims still had a carrying value of nil in TPL’s accounts. Accordingly, if nothing were done, TPL would in principle become liable to CT on profits equivalent to the full amount of the sums received as and when the claims were realised.

On advice from Ernst & Young LLP (“EY”), who devised the scheme and were also TPL’s auditors, TPL hoped to escape this potential liability by the simple expedient of transferring the relevant claims to a newly-incorporated and wholly-owned Jersey subsidiary, called Teesside Recoveries and Investments Limited (“TRAIL”), in consideration for the issue by TRAIL to TPL of equivalent numbers of fully paid ordinary shares in TRAIL representing the fair value of the claims. There were three transfers in all, two of which took place on 5 December 2006 and the third on 2 March 2007. Thus TPL exchanged its beneficial ownership of the claims for beneficial ownership of the corresponding shares in TRAIL, and TPL now had indirect (shareholder) control, through its ownership of TRAIL, instead of direct (managerial) control in its own right, over the future realisation or utilisation of the claims.

Throughout these proceedings, it has been common ground that the claims gave rise to “loan relationships” within the meaning of the taxation regime governing corporate loan relationships which was first enacted in Chapter II of Part IV of the Finance Act 1996 (“FA 1996”). The loan relationship legislation has been substantially amended on a number of occasions since its introduction, and we are concerned with the code as it stood in the tax year 2006/07, including (as I shall explain) important amendments made by the Finance Act 2004 (“FA 2004”) and (with effect from 19 July 2006) by the Finance Act 2006 (“FA 2006”).

The scheme was designed on the basis that the transfer of the claims by TPL to TRAIL would not give rise to any “credits” which, in accordance with UK GAAP, would have to be taken into account in computing the profits and gains arising to TPL in its two relevant accounting periods (the first of which ended on 5 December 2006, and the second of which ran from 6 December 2006 to 30 September 2007). In other words, the intention was that the transfers would not generate any taxable credits in the hands of TPL, and that the shares in TRAIL would have a carrying value of nil in TPL’s accounts in the same way as the claims for which they had been exchanged.

On the other hand, it is agreed that the position of TRAIL was different from that of TPL, in that TRAIL acquired assets which did not represent anything it had previously owned, and provided full consideration for those assets by the issue of corresponding numbers of its own shares at par. Thus the base value of the claims in the hands of TRAIL was their market value of approximately £200 million, and TRAIL would in principle subsequently realise a profit from the claims only if and to the extent that realisations exceeded that base value. As a company registered and resident for tax purposes in Jersey, TRAIL was not itself liable to CT; but it was a “controlled foreign company” (or “CFC”) within the meaning of the UK tax legislation dealing with CFCs, and as such its future profits (if any) were liable to be attributed to TPL and taxed in the UK accordingly. The critical difference from the status quo, however, was that only profits arising from realisations in excess of the £200 million base value could be “brought home” in this way and taxed in the hands of TPL. So the overall effect of the scheme, if it worked, was that the £200 million would fall permanently outside the net of CT, because (a) the transfers of the claims to TRAIL gave rise to no loan relationship credits in the hands of TPL, and (b) any subsequent profits realised by TRAIL from the claims would be taxable under the CFC legislation only to the extent that they exceeded the £200 million base value.

Similarly, if TRAIL were subsequently to pay up distributable profits by way of dividend to TPL, it could only do so to the extent that it had accounting profits in excess of the base value which were available for distribution under Jersey company law (which the parties were content to assume was the same for all material purposes as English company law), and TPL would again be taxable on only that amount.

In the event, TRAIL subsequently received sums totalling approximately £243 million in respect of the claims, between April 2007 and May 2008. TRAIL never held any assets other than the claims, and the proceeds from their realisation were for the most part lent back to TPL on an unsecured and interest free basis. We were informed by leading counsel for HMRC, Mr David Milne QC, that no charge under the CFC legislation was made on TPL in respect of the profit element of £43 million realised by TRAIL, because the equivalent sum was in fact paid up by TRAIL to TPL by way of dividend and was taxable in the hands of TPL on that basis. On 3 July 2008, the directors and shareholders of TRAIL passed a special resolution to wind up the company. The sole purpose for which it had been brought into existence had been accomplished.

At this point, it may be helpful to quote the description of the scheme provided by EY when they notified it to HMRC on 8 December 2006 under the “Disclosure of Tax Avoidance Schemes” (or “DOTAS”) rules introduced by section 308 of FA 2004, as follows:

The DOTAS disclosure went on to explain how the expected tax advantage would arise:

It has a value, albeit one that cannot be readily or reliably ascertained.

It falls to be treated as a loan relationship because of the existence of a money debt and documentation issued to represent the rights of the creditor.

It is not recognised as an asset under UK GAAP, for instance as a result of uncertainty regarding the amounts that might ultimately be collected and their timing.

In due course, after TPL had submitted its tax returns and computations for the two accounting periods, HMRC opened enquiries into the returns which resulted in the issue of closure notices on the footing that loan relationship credits should be brought into account on the dates when the claims were transferred to TRAIL, in the sum of £194,899,838 for the first period and £5,154,631 for the second period. Following an internal review, which confirmed HMRC’s position, TPL appealed against the closure notices to the First-tier Tribunal (“the FTT”) (Judge Rachel Short and Mr Nigel Collard) which heard the appeal over three days in April 2015. The issues before the FTT were these:

Was the accounting treatment adopted by TPL in respect of the transfer of the claims permissible in accordance with UK GAAP at the material time?

Would any (and if so what) alternative accounting treatment have been available in respect of the transfer and permissible in accordance with UK GAAP?

If more than one UK GAAP-compliant accounting treatment was available, was TPL required by section 84(1) of FA 1996 to bring debits and credits into account for CT purposes in accordance with one (and if so which) of those alternative treatments?

If the only UK GAAP-compliant accounting treatment available was the one adopted by TPL, was TPL nevertheless required by section 84(1) to bring debits and credits into account otherwise than by reference to the accounts, and if so, how were such debits and credits to be determined?

The fourth issue turned, in particular, on the scope and meaning of the words “fairly represent” in section 84(1) of FA 1996, which in its then current form provided that:

all profits, gains and losses of the company, including those of a capital nature, which (disregarding interest and any charges or expenses) arise to the company from its loan relationships and related transactions; and

all interest under the company’s loan relationships and all charges and expenses incurred by the company under or for the purposes of its loan relationships and related transactions.”

By its decision released on 11 August 2015 (“the FTT Decision”), the FTT found in favour of TPL that its accounts complied with GAAP, that there was no alternative accounting treatment which would also have complied, and that HMRC were obliged to accept those accounts. On the other hand, the FTT decided issue (d) in favour of HMRC, holding that the accounting treatment did not in the circumstances fairly represent TPL’s profits in the two periods and that £200 million of profit should be recognised in TPL as a consequence of the transfer of the claims. Accordingly, TPL’s appeal was dismissed.

TPL then appealed to the Upper Tribunal (Newey J and Judge Colin Bishopp), which heard the appeal over three days in November 2016 and released its decision (“the UT Decision”) on 17 February 2017. The Upper Tribunal reached the same conclusion as the FTT, holding that HMRC’s challenges to the FTT’s conclusions on the three accounting issues all failed, but that section 84(1) required TPL to bring into account for tax purposes a sum representing the value of the shares allotted to it by TRAIL in exchange for the transfer of the claims.

TPL now appeals to this court, with permission granted by the Upper Tribunal. By a respondent’s notice, HMRC seek to renew their challenge to the conclusions of the FTT on the accounting issues as being erroneous in law.

HMRC have throughout been represented by Mr Milne QC, leading Ms Elizabeth Wilson (and, in this court, Mr Ben Elliott). TPL was represented before the two Tribunals by Mr Jonathan Peacock QC and Mr Richard Boulton QC, but on the appeal to this court Mr Julian Ghosh QC has replaced Mr Peacock, while Mr Charles Bradley has been added to the team of counsel. We heard three full days of legal argument from Mr Ghosh, Mr Boulton and Mr Milne. The division of labour between Mr Ghosh and Mr Boulton was that the former dealt with issues of tax law and construction of the relevant legislation, while the latter dealt with the accountancy and company law issues.

The basic facts are relatively simple, and not in dispute. They are clearly set out in the decisions below. What follows is a summary, mainly based on the UT Decision at [3] to [19].

From 1993, TPL owned and operated a power station at Redcar and Cleveland, in Teesside. TPL’s business included selling electricity on a wholesale basis to customers such as Enron Corporation and British Energy. Under “off-take” agreements entered into with Enron Capital Trade Resources Limited (“ECTRL”) and Enrici Power Marketing Limited (“Enrici”), each of which was part of the Enron group of companies, TPL contracted to sell the majority of the output of the power station to those companies. The obligations of ECTRL and Enrici under the agreements were guaranteed by Enron Corporation (“EC”).

Following the collapse of the Enron group, in late 2001 EC filed for relief under Chapter 11 of the United States Bankruptcy Code and ECTRL went into administration in the UK. In January 2006, Enrici also went into administration in the UK, followed by a creditors’ voluntary liquidation in December of that year.

TPL had very substantial claims against the Enron group. In 2005, a US Bankruptcy Court allowed TPL’s proofs of claim totalling $907,720,278 against EC (“the Enron Claim”) and ECTRL entered into a settlement deed which admitted a liability to TPL of £360,767,273 plus interest (“the ECTRL Claim”). In November 2006, EC and the administrators of ECTRL issued letters recognising the extent of TPL’s claims against those companies. In February 2007, the administrators of Enrici accepted that Enrici owed TPL £101,071,188 (“the Enrici Claim”). I will follow the Tribunals in referring to the Enron Claim, the ECTRL Claim and the Enrici Claim together as “the Claims”.

By 5 December 2006, TPL had received cash distributions in respect of the Enron Claim totalling some £120 million, plus shares in a company called Portland General Electric (“Portland”) worth about £14 million. These receipts were recognised as exceptional items in the profit and loss account in TPL’s financial statements for the periods ended 31 December 2005 and 5 December 2006. CT was duly paid on the amounts received, and as I have already explained CT would have continued to be payable on subsequent receipts in the same way if TPL had not entered into the scheme.

TPL received no distributions in respect of the ECTRL and Enrici Claims during its two accounting periods which ended on 5 December 2006.

On 1 December 2006, TPL established TRAIL in Jersey.

In a memorandum addressed to the board of directors of TRAIL dated 5 December 2006, Carval Investors LLC valued the Enron and ECTRL Claims at, respectively, $199,698,461 (equivalent to 22 cents per dollar, or £101,100,347) and £93,799,491 (equivalent to 26 pence in the pound). It appears to be common ground that this was an arm’s length, third party valuation, even though the director who signed the memorandum on behalf of Carval was also a director of TRAIL. The memorandum explained that a secondary market for Enron claims had developed over the years, as a result of which it was possible to estimate the fair value of Enron claims based on the indicative bids and offers of potential buyers and brokers. There was also a secondary market for claims against ECTRL. Nevertheless, there was still “significant uncertainty regarding the future recovery values”, there were numerous unresolved issues in both insolvent estates, and experience suggested that it was “not uncommon to see bankruptcies such as these (particularly in the UK) drag on for a considerable period”.

The memorandum did not include a valuation of the Enrici Claim, but in a separate paper headed “Review of Enron Estate Payment Position”, which appears to have been prepared on 22 November 2006 and presented to TPL’s board, it was noted that almost no progress had been made since Enrici had entered administration in January 2006, and that it was “almost impossible to form a view on when and how much will be distributed from the Enrici Estate”.

On 5 December 2006, TPL assigned to TRAIL (a) its rights in relation to the Enron Claim in consideration for the issue to TPL of 101,100,347 ordinary shares in TRAIL, and (b) its rights under the settlement deed with ECTRL (i.e. the ECTRL Claim) in consideration for the issue to TPL of a further 93,799,491 ordinary shares in TRAIL. The third assignment took place on 2 March 2007, when TPL assigned to TRAIL its rights in respect of the Enrici Claim in consideration for the issue to TPL of 5,154,631 ordinary shares in TRAIL.

TRAIL subsequently received a total of £243,149,027 in respect of the Claims, on various dates between April 2007 and May 2008. The details are set out in the FTT Decision at [18]. The sums included distributions from the estates of all three companies, shares in and dividends from Portland, and the proceeds of sale of the residual Claims in March and May 2008.

TPL’s financial statements for the period to 5 December 2006 did not attribute any value to its shares in TRAIL, or to the claims against EC and ECTRL which had been assigned to TRAIL. Notes to the statements explained that the investment in TRAIL was stated at a cost of nil, being the carrying value of the claims transferred to TRAIL at the date of the transfer, and that the assigned claims had been accounted for as contingent assets, with no further value recognised in respect of them because of the continuing uncertainty over the timing and amounts of further distributions. The financial statements received an unqualified audit opinion from EY.

TPL’s financial statements for the following period to 30 September 2007 dealt in a similar way with the transfer of the Enrici Claim in March 2007, and again received an unqualified audit opinion from EY.

By contrast, the Claims were treated as having substantial value in TRAIL’s accounts for the year ended 30 November 2007. The balance sheet showed net assets of £245,046,825, including a “loan receivable” of £132,999,000 in respect of realisations which had been lent up by TRAIL to TPL, and a figure of £108,051,120 for “claims receivable”. A note recorded that the claims receivable were stated at their recoverable value, while unrealised gains were recognised within the profit and loss account. In their audit opinion, EY said that the statements gave “a true and fair view, in accordance with United Kingdom Accounting Standards, of the state of the company’s affairs as at 30 November 2007”, and had been properly prepared in accordance with the Companies (Jersey) Law 1991.

On 3 July 2008, as I have already recorded, TRAIL was put into liquidation. By then, it had fully liquidated the Claims and either lent or distributed the proceeds to TPL.

As Lord Walker of Gestingthorpe JSC explained in DCC Holdings (UK) Limited v Revenue and Customs Commissioners[2010] UKSC 58, [2011] 1 WLR 44, at [7]:

Chapter II of Part IV of FA 1996 is introduced by section 80, subsection (1) of which states that:

“Loan relationships” are then defined by section 81. The primary definition, in section 81(1), covers cases in which “the company stands… in the position of a creditor or debtor as respects any money debt”, and “that debt is one arising from a transaction for the lending of money.” For present purposes, however, the relevant provision is section 81(3), which says that:

The exclusivity of the loan relationship regime is reinforced by section 80(5), which states that:

Section 82 is headed “Method of bringing amounts into account”, and subsection (1) states that:

the profits and gains arising from the loan relationships of a company, and

any deficit of on a company’s loan relationships,

The debits and credits to be brought into account are then specified by section 84, which provides that:

all profits, gains and losses of the company, including those of a capital nature, which (disregarding interest and any charges or expenses) arise to the company from its loan relationships and related transactions; and

all interest under the company’s loan relationships and all charges and expenses incurred by the company under or for the purposes of its loan relationships and related transactions.

In this Chapter “related transaction”, in relation to a loan relationship, means any disposal or acquisition (in whole or in part) of rights or liabilities under that relationship.

The cases where there shall be taken for the purposes of subsection (5) above to be a disposal and acquisition of rights or liabilities under a loan relationship shall include those where such rights or liabilities are transferred… by any sale, gift, exchange, surrender, redemption or release.

Schedule 9 to this Act contains further provisions as to the debits and credits to be brought into account for the purposes of this Chapter.”

It is also important to note that, until the amendments effected by FA 2004, the words “when taken together, fairly represent” were preceded by “in accordance with an authorised accounting method and”, so that the subsection read:

The 2004 amendments also introduced important changes in the prescribed methods of accounting that were to be used for the purposes of the Chapter. As originally enacted, section 85 provided that two alternative accounting methods were authorised: an accruals basis of accounting, and a mark to market basis (under which any loan relationship to which that basis was applied is brought into account in each accounting period at a fair value). As a result of the 2004 amendments, these requirements were replaced by sections 85A and 85B, the general effect of which was to require the computation of debits and credits to be performed in accordance with UK GAAP. So far as material, and incorporating the further amendment to section 85A(1) in 2006 to which I refer below, those sections provide that:

Subject to the provisions of this Chapter (including, in particular, section 84(1)), the amounts to be brought into account by a company for any period for the purposes of this Chapter are those that, in accordance with generally accepted accounting practice, are recognised in determining the company’s profit or loss for the period.

If a company does not draw up accounts in accordance with generally accepted accounting practice (“correct accounts”) –

the provisions of this Chapter apply as if correct accounts had been drawn up, and

the amounts referred to in this Chapter as being recognised for accounting purposes are those that would have been recognised if correct accounts had been drawn up.

Any reference in this Chapter to an amount being recognised in determining a company’s profit or loss for a period is to an amount being recognised for accounting purposes –

in the company’s profit and loss account or income statement,

in the company’s statement of recognised gains and losses or statement of changes in equity, or

in any other statement of items brought into account in computing the company’s profits and losses for that period.

“Generally accepted accounting practice” is defined for the purposes of the Tax Acts by section 50 of FA 2004. Unless a company prepares its accounts in accordance with “international accounting standards”, the expression means “UK generally accepted accounting practice”, which in turn means “generally accepted accounting practice with respect to accounts of UK companies… that are intended to give a true and fair view”: see section 50(1) and (4)(a).

Schedule 6 to FA 2006, headed “Avoidance involving financial arrangements”, introduced a number of amendments with the explicit purpose of countering tax avoidance. Section 76, in the body of the Act, incorporated the schedule with these words:

Section 85A of FA 1996 (computation in accordance with generally accepted accounting practice) is amended as follows.

In subsection (1) (amounts to be brought into account are those recognised in determining company’s profit or loss) after “Subject to the provisions of this Chapter” insert “(including, in particular, section 84 (1))”.”

So it was that the introductory words of section 85A(1) (“Subject to the provisions of this Chapter”) were reinforced by the addition of an express reference to section 84(1), which, as we have seen, had itself been amended in 2004 and contains the requirement that the credits and debits to be brought into account in respect of a company’s loan relationships “shall be the sums which, when taken together, fairly represent, for the accounting period in question” all profits, gains and losses of the company which arise to it “from its loan relationships and related transactions”.

At first sight, this is a rather puzzling amendment. Why did Parliament think it appropriate to single out section 84(1) as a provision of Chapter II to which the computation rule in section 85A(1) was subject, when it was already included in the words “the provisions of this Chapter” at the start of section 85A(1)? From one point of view, this was merely a statement of the obvious. Yet it must be assumed that Parliament had a more specific purpose in mind, and did not intend merely to enact a tautology. Furthermore, given the context of the amendment in the anti-avoidance provisions contained in schedule 6 to FA 2006, Parliament’s purpose must in some way have been to help counter tax avoidance through abuse of the loan relationship legislation.

If the amendment is viewed in this light, I would be inclined to infer that Parliament’s purpose must have been to make it clear that the “fairly represent” requirement in section 84(1) is a separate and potentially overriding condition which has to be satisfied, once the initial computation in accordance with UK GAAP has been performed. The enquiry under section 84(1), in its post-2004 form, is different from, and wider than, the link with UK GAAP mandated by section 85A(1), in at least two respects. First, section 84(1) requires regard to be had to any related transactions as well as to the relevant loan relationship itself. Thus, in the present case, the focus is widened from the application of UK GAAP to the position of TPL viewed in isolation, and regard must also be had to the effect of the assignments of the Claims to TRAIL. Secondly, the requirement to “fairly represent” the profits, gains and losses arising to the company will not necessarily be answered by saying that they are recognised in accordance with UK GAAP, because section 84(1) would then add nothing of substance to section 85A(1), and there would be no point in making the latter provision expressly subject to the former.

This interpretation of the 2006 amendment to section 85A(1) is supported, in my judgment, by the Explanatory Note to clause 76 and schedule 6 of the Finance (No.2) Bill 2006, which became section 76 and schedule 6 of FA 2006. The summary in paragraph 1 of the Explanatory Note said that:

The explanation for what became paragraph 11 of schedule 6 (then paragraph 5 of the Bill) stated (in paragraph 57) that its purpose was “to make it absolutely clear” that section 85A(1) of FA 1996 was “subject to section 84(1) of that Act.” The background to the amendment was then described as follows:

The status of Explanatory Notes, and the extent to which it is permissible to have regard to them in construing a statute, were considered by Lord Steyn in R (Westminster City Council) v National Asylum Support Service[2002] UKHL 38, [2002] 1 WLR 2956, at [2] to [6]. He explained that since 1999 Explanatory Notes have been published in conjunction with the majority of public Bills introduced in either House of Parliament by a Government minister. He observed, at [4], that:

Lord Steyn continued, at [5]:

At [6], Lord Steyn added this salutory warning:

The observations of Lord Steyn in the National Asylum Service case were not commented upon by the other members of the court, but he returned to the same theme, more briefly, in R (S) v Chief Constable of the South Yorkshire Police [2004] UKHL 39, [2004] 1 WLR 2196, at [4], in a speech with the reasoning of which Lord Rodger of Earlsferry, Lord Carswell and Lord Brown of Eaton-under-Heywood all agreed: see [63], [80] and [85]. Lord Steyn there said:

With the benefit of this guidance, I think it is permissible to take account of the Explanatory Notes which I have quoted in identifying the anti-avoidance purpose of the 2006 amendment to section 85A(1) and the mischief at which it was aimed, namely making it absolutely clear that the “fairly represent” rule in section 84(1) takes priority over, and may override, the accounting treatment mandated by section 85A(1). As I have explained, these are inferences which I would anyway be disposed to draw in the absence of the Explanatory Notes, and I emphasise that in the present case I regard the value of the Explanatory Notes as no more than confirmatory. I also recognise that the final two sentences of paragraph 59 of the Notes are not admissible to the extent that they reflect the wishes and desires of the Government about the scope and effect of the amendment; but that recognition does not in my view invalidate the inference to be drawn from Parliament’s decision to single out section 84(1) as a provision to which section 85A(1) is expressly made subject.

I propose at this stage to deal briefly with the accounting issues, which both Tribunals have decided in favour of TPL. They are fully and clearly discussed by the Upper Tribunal in paragraphs [49] to [73] of the UT Decision, which is reported at [2017] STC 1622.

The FTT had the benefit of expert accounting evidence on both sides. TPL’s expert was Mr Kenneth Wild OBE, who was a fellow of the ICAEW and formerly head of Deloitte’s financial reporting technical department and a member of the UK Accounting Standards Board. The FTT found him to be “a knowledgeable witness with extensive experience of both accounting theory and practice acquired through many years of employment as a technical accounting expert”: see the FTT Decision at [51]. HMRC’s expert was Ms Eileen Patricia Baird, who was a member (she too is now a fellow) of the ICAEW and had been employed as an accountant by HMRC since 2009. Mr Wild’s opinion, which the FTT accepted, was that the accounting treatment adopted by TPL in respect of the transfer of the Claims to TRAIL fully complied with UK GAAP, and that there was no other permissible accounting treatment. Ms Baird, on the other hand, considered that TPL’s approach did not accord with GAAP. In her view, TPL should have accounted for the shares that it acquired in TRAIL at a cost equal to the consideration of £200,054,469 specified in the assignments. Since the gains on disposal of the Claims were unrealised, it was her opinion that they should have been accounted for in TPL’s statement of total recognised gains and losses (or “STRGL” for short): see the UT Decision at [50].

As the Upper Tribunal went on to explain, the STRGL was introduced by Financial Reporting Standard (“FRS”) 3, which dealt with “Reporting Financial Performance”. Other relevant Standards included FRS 5, entitled “Reporting the Substance of Transactions”, which required “an entity’s financial statements to report the substance of the transactions into which it has entered”, and FRS 12, entitled “Provisions, Contingent Liabilities and Contingent Assets”, one of the purposes of which was to ensure that contingent assets should not be recognised until they were either realised or the realisation of a profit from them was “virtually certain”.

The Upper Tribunal then summarised salient features of the evidence of Mr Wild and Ms Baird, before reaching these conclusions:

The Upper Tribunal then went on to consider HMRC’s submission that TPL’s accounts were not GAAP-compliant because they contravened a provision of the Companies Act 1985 (“CA 1985”) relating to company accounts. The relevant provision was contained in paragraph 17 of schedule 4 to CA 1985, which (put shortly) required “the amount to be included in respect of any fixed asset” to be “its purchase price or production cost”, with “purchase price” defined in section 262 of that Act as including “any consideration (whether in cash or otherwise) given by the company in respect of that asset”. The argument advanced for HMRC by Mr Milne was that the shares in TRAIL that TPL acquired represented a fixed asset, so their “purchase price” had to be included in TPL’s accounts; and the “purchase price” had to include the consideration of some £200 million given for the shares. This sum need not have featured in TPL’s profit and loss account, said Mr Milne, but it should have been reflected in the company’s STRGL.

After pointing out that these submissions, if correct, could have far-reaching implications, because they would imply a conflict between the relevant accounting standards and the requirements of CA 1985, the Upper Tribunal referred to what they described as a “highly influential opinion written by Mr Leonard Hoffmann QC and Miss Mary Arden (as they then were) in September 1983”, where the authors said that “the courts will treat compliance with accepted accounting principles as prima facie evidence that the accounts are true and fair”. The Upper Tribunal also referred to some judicial endorsements of those views, and to Parliamentary recognition of accounting standards, as well as to Mr Wild’s evidence on the question, before concluding as follows:

Despite its success on the accounting issues, TPL failed on the fourth issue (which raised the question of the effect of section 84(1) of FA 1996) before both Tribunals. It is therefore convenient to begin by considering TPL’s appeal on this issue.

The reasoning of the FTT and the Upper Tribunal

The FTT dealt with this issue at [144] to [164] of the FTT Decision.

The FTT began its discussion as follows:

The FTT then referred, at [149], to the acceptance by TPL that one purpose of “the fair representation rule” in section 84(1) was properly to allocate profits on a timing basis to the correct period. The FTT commented that this reflected the requirements of FRS 12, and was “based on the accounting concept of prudence which will always tend to defer the recognition of profits.” The FTT continued, in a passage which encapsulates their view of the case:

This approach, in the FTT’s view, built on TPL’s acceptance that section 84(1) could be used for the proper allocation of profits between accounting periods, because its effect was to accelerate credits which would otherwise be recognised in a later accounting period: see [154]. “To take any other approach”, said the FTT (ibid), “would remove the ability of s 84(1) to adjust credits and debits to give a fair representation of profits.”

The FTT was also unimpressed by the submission that moving away from GAAP would leave “the Tribunal without the ability to quantify profits”. It said, at [155]:

In the final part of its discussion, the FTT looked at the picture more broadly and examined the impact of FRS 5 in ascertaining the substance of a transaction. It commented, at [158], that “FRS 5 contains a strong subjective element, as made clear by the very different view of the substance of the transaction taken by Ms Baird and Mr Wild.” The FTT added, at [159]:

The FTT then said, at [161]:

After summarising the FTT’s decision at [74] to [76] of the UT Decision, and reciting at some length the arguments addressed to them by Mr Peacock for TPL and by Mr Milne for HMRC, the Upper Tribunal stated their conclusions at [99] to [107]. They began their discussion by agreeing with Mr Peacock that section 84(1) “does not import some overarching requirement of “fairness”, allowing a Court or Tribunal to impose its own perception of the right result.” They said that the FTT had not fallen into this trap, and referred to [161] of the FTT Decision where the purpose of section 84(1) had correctly been identified as the fair representation of TPL’s profits for tax purposes. In relation to the solution adopted by the FTT, the Upper Tribunal said at [99]:

The Upper Tribunal continued:

In the view of the Upper Tribunal, it was unnecessary to look beyond the decision of the Supreme Court in the DCC Holdings case in order to resolve the issue. They reasoned as follows:

In their skeleton argument in support of the appeal, counsel for TPL provide a helpful outline of TPL’s case. Somewhat simplified, it runs as follows:

TPL’s assignment of the Claims to TRAIL did not yield any commercial profit in TPL’s hands, because the value of the consideration shares issued by TRAIL was equal to the fair value of the Claims.

Nor did TPL realise an accounting profit on the assignment, because it did not realise a commercial profit. Since the nature of the Claims remained unaltered after the assignment, and the only consideration received by TPL was in the form of shares issued by TRAIL, there is no way in which TPL’s profits (whether accounting or otherwise) could have been increased.

As the FTT found and the Upper Tribunal upheld, there was no other method of accounting for the assignment of the Claims, so far as TPL was concerned.

Section 84(1) of FA 1996 cannot be construed or applied so as to override a company’s accounts, nor does it admit of a reading which creates taxable credits and debits where none exist as a matter of GAAP.

Further, to construe section 84(1) as a provision which overrides GAAP has no foundation in principle, because any such application of the section would inevitably be imprecise and arbitrary.

Such a construction and application of section 84(1) would also be contrary to the scheme of the loan relationship provisions, and would in particular conflict with section 85A(2) (which provides for the imposition of “correct accounts” where the actual accounts do not comply with GAAP) and with the adjustment provisions contained in schedule 9.

The Upper Tribunal wrongly ignored the binding decision of the Court of Appeal in Greene King PLC v HMRC[2016] EWCA Civ 782, [2017] 4 WLR 190, which holds that section 84(1) cannot be interpreted or applied so as to override a company accounts, and thus conclusively decides the issue in favour of TPL.

The legislative history of the loan relationship provisions, and section 84 in particular, shows that section 84(1) cannot ever have been intended to override a company’s GAAP-compliant accounts by reference to some sort of unspecified economic reality, particularly as TPL made no profit or gain of any description on the assignments.

Finally, had TRAIL been resident for tax purposes in the UK, it would have been taxable in respect of any profit in respect of the Claims. The only reason TRAIL was not so taxable is because TRAIL was not UK tax resident. An attack on TPL to compensate HMRC for HMRC’s inability to tax TRAIL is unprincipled and impermissible.

In relation to the loan relationship legislation, TPL makes two main points. The first is that what counsel call “the “fairly represents” mechanism” in section 84(1) has an “attribution function”, and is designed to ensure that the relevant credits and debits, once identified, relate only to credits and debits which arise from the company’s loan relationships during the accounting period in question. This mechanism would be needed, it is said, if (for example) a company made a profit from a sale of both loan relationships and shares, or if a company has an accounting period of more than twelve months which has to be sub-divided for tax purposes: see sections 8(3), 12 and 834(1) of the Income and Corporation Taxes Act 1988.

The second point is that there are express provisions in the legislation which do adjust a company’s accounts. They are set out in schedule 9 to FA 1996, which is headed “Loan relationships: special computational provisions”. So, for example, paragraph 10 of schedule 9 excludes any “loss” from a company’s loan relationship computation, to the extent that the loss is “referable to a time when the [loan relationship] was not subject to United Kingdom taxation…”; while paragraph 11 of the schedule adjusts credits and debits in respect of a non-arm’s length related transaction onto an arm’s length basis. This latter provision is particularly telling, submits TPL, because it shows that Parliament did not consider that any adjustment was required, for loan relationship purposes, of the debits and credits arising on the assignment of a loan relationship where, as in the present case, the assignment was on an arm’s length basis. Furthermore, it is said, paragraph 11 of schedule 9 would be redundant if the “fairly represents” mechanism has the meaning for which HMRC contend, because it would have been pointless to substitute arm’s length terms for non-arm’s length terms if even arm’s length terms were capable of being overridden by section 84(1)(a).

Our attention was also drawn to paragraph 11B of schedule 9, introduced by the Finance Act 2008, which in broad terms taxes profits on an assignment of a loan relationship if the assignment is informed by a “tax avoidance” purpose. This provision was not in force at the relevant times, but according to TPL it provides another example of an adjustment provision which would be redundant if section 84(1) has the overriding effect identified by the Tribunals below.

Turning to authority, TPL places considerable reliance on the decision of this court in Greene King which was handed down on 27 July 2016, a few months before the Upper Tribunal hearing in the present case in November 2016. Greene King concerned another loan relationship tax avoidance scheme devised and marketed by EY. The facts were far removed from the scheme with which we are concerned, although the artificial series of transactions designed by EY did include the assignment by the parent company of a group to a subsidiary of the parent’s entitlement to receive the future interest under a loan, in consideration for which the subsidiary issued £1.5 million of preference shares to the parent. For present purposes, the relevant ground of appeal was ground 4, whereby the parent submitted that the accretion back to it of £20.5 million (representing the net present value of the future interest payments under the loan) fell to be excluded from section 84(1)(a) in any event because it did not “fairly represent” profit as required by the wording of that subsection: see the judgment of Sir Terence Etherton C (with whom Patten and Sales LJJ agreed) at [71].

Counsel for the taxpayers relied upon the judgment of Moses LJ in the Court of Appeal in DCC Holdings[2009] EWCA Civ 1165, [2010] STC 80, where he said at [63]:

It is essential to note at this point that the version of section 84(1) which was considered by Moses LJ in DCC Holdings, and by the Court Appeal in Greene King, was the version as it stood before the amendments made by FA 2004. At that date, it will be recalled, the statutory wording referred to “the sums which, in accordance with an authorised accounting method and when taken together, fairly represent, for the accounting period in question…”. It was in relation to that statutory wording that the Chancellor in Greene King rejected the submission for the taxpayers advanced by John Gardiner QC, as follows:

Returning to the present case, TPL submits that Greene King is still binding authority on the meaning of “fairly represent” in section 84(1), even though that case was concerned with the pre-2004 wording of the section, because the subsequent excision of the phrase “in accordance with an authorised accounting method” from section 84(1) was replaced by the enactment of sections 85A and 85B requiring computation in accordance with GAAP. Nothing of substance had changed by reason of FA 2004, as the Explanatory Notes to the relevant changes in FA 2004 make clear.

In oral argument, Mr Ghosh submitted to us that if the mere removal of the words “in accordance with an authorised accounting method” from section 84(1) had changed the scope and meaning of the “fairly represent” requirement in the way contended for by HMRC, so that it became a form of economic override, that would be “the most massive side wind in legislative history.”

A further point upon which TPL places much emphasis is the submission, articulated in various ways, that HMRC’s real complaint in this case is about the non-resident tax status of TRAIL. Had TRAIL been tax resident in the UK, TRAIL would have been taxable on any profit subsequently realised in respect of the Claims, and it would not have had the benefit of a £200 million base cost in computing that profit. This follows from paragraph 12 of schedule 9, which so far as material provides that:

a related transaction between two companies that are –

members of the same group, and

within the charge to corporation tax in respect of that transaction,

For the purpose of determining the credits and debits to be brought into account for the purposes of this Chapter in respect of the loan relationship –

for the accounting period in which the transaction or, as the case may be, the first of the series of transactions takes place, the transferor company shall be treated as having entered into that transaction for a consideration equal to the notional carrying value of the asset or liability representing the relationship; and

for any accounting period in which it is a party to the relationship, the transferee company shall be treated as if it had acquired the asset or liability representing the relationship for a consideration equal to the notional carrying value of the asset or liability.

In his oral submissions, Mr Ghosh was very critical of the decisions of both Tribunals. He described the FTT’s view “that on any realistic commercial approach to this transaction, these claims were monetised when they were exchanged for shares in TRAIL” (at [151] of the FTT Decision) as unintelligible. Nothing of substance had changed when the Claims were assigned to TRAIL, and in no sense were they converted into money as they would have been on a sale to an outside purchaser. On a sale, TPL would have given up ownership of the Claims and received money instead. On ordinary principles, a profit would have crystallised and would have been recognised accordingly. By contrast, the effect of the assignments was merely that TPL exchanged its rights in respect of the Claims for shares in TRAIL. TPL remained fully exposed to future fluctuations in the value of the Claims, albeit indirectly rather than directly; but neither commercially, nor as a matter of accounting, had any profit crystallised. The position was in substance no different than if TPL had simply made a gift of the Claims to TRAIL.

As for the UT Decision, Mr Ghosh submitted that it was fundamentally flawed, both in its endorsement of the FTT Decision and in the Upper Tribunal’s own additional observations and reasoning. Mr Ghosh emphasised the exclusivity of the loan relationship provisions, and the absence of any statutory guidance or criteria by reference to which the “fairly represent” requirement should be applied if it were decoupled from GAAP. Further, the Upper Tribunal’s search for a symmetrical solution, based on the approach of the Supreme Court in DCC Holdings, was mistaken in principle, because the only asymmetry in the present case was caused by TRAIL’s non-UK tax residence. The Upper Tribunal’s view, at [105] of the UT Decision, that TPL had somehow made a gain which had to be brought into account for tax purposes, because TRAIL, by recognising the Claims at their Carval valuation, “had bestowed on itself a substantial positive balance sheet” was, in his submission, incomprehensible. TPL made neither a profit nor a loss as a result of a transactions, and the reason why the Claims had a positive value in TRAIL’s balance sheet was that they were valuable assets which TRAIL had not previously owned, and in consideration for which it had issued shares at par to TPL.

On the construction of section 84, HMRC submit that following the amendment to section 85A(1) made by FA 2006, if not before, the “fairly represent” requirement does indeed potentially override the accounting treatment mandated by sections 85A and 85B. It follows that, in order to ascertain the credits or debits to be brought into account for a period, section 84 requires the company to do two things. First, it must bring into account the amounts which have been recognised by the company in its GAAP-compliant account, whether in the profit and loss account or in the STRGL. Alternatively, where there are no such accounts, the company must bring into account the amounts which would be recognised by GAAP-compliant accounts. This is the effect of sections 85A and 85B. Secondly, the company must then evaluate the amounts thus brought into account, in order to check whether they are “sums which fairly represent” the profits, gains and losses, and the interest charges and expenses, as set out in section 84(1)(a) and (b). HMRC submit that this is the clear effect of the words used in section 84(1), read together with sections 85A and 85B; and it gives full effect to the opening words of section 85A(1) as amended. In particular, it would make no sense to interpret section 84 as merely re-imposing a requirement which should already be satisfied by GAAP-compliant accounts.

Furthermore, say HMRC, this interpretation accords with the clear legislative policy of Chapter II. Precisely because it contains a comprehensive and exclusive code charging to tax all profits, gains and losses arising to a company from its loan relationships and related transactions, one would expect to find a “longstop” or “failsafe” provision which has the effect that significant profits arising to a company from its loan relationships do not vanish or fall out of charge to tax. In this connection, Parliament would have been aware that there can often be more than one correct accounting treatment for a transaction, and that a taxpayer might seek to exploit a GAAP-compliant accounting method in order to avoid tax. Parliament would not have intended to make CT on loan relationships voluntary. Any possible doubt on this score is dispelled by the Explanatory Notes to the relevant 2006 amendment.

HMRC go on to submit that, properly understood, DCC Holdings supports their interpretation of section 84. That case was concerned with sections 84(1) and 85 as originally enacted, when the “fairly represent” requirement was tied to an authorised accounting method. Even when the legislation was in that form, however, the substantive importance of the fair representation test was recognised by Lord Walker in his judgment at [43] and [44]. In particular, Lord Walker said at [43] (with emphasis supplied):

The point may be tested, submits Mr Milne, by supposing a case where two or more GAAP-compliant methods are available, one of which produces a mismatch (or asymmetry) so that consideration which is agreed to have been paid on a sale of rights under a loan relationship is recognised by the buyer but not the seller. The seller adopts the accounting method which appears to deliver the mismatch, in the hope of obtaining a tax advantage. In such a case, consideration of the sums which “fairly represent” the profits and gains arising to the company may well require the seller to bring into account as a loan relationship credit the amount given by the alternative GAAP-compliant method, because it alone satisfies section 84(1). Such an approach would be entirely consistent with authorities such as Johnston v Britannia Airways [1994] STC 763, which establish the general proposition that in the ordinary case both HMRC and the taxpayer are bound by whatever choice of GAAP-compliant accounting is adopted by the taxpayer, precisely because the loan relationship code has a statutory override which HMRC are free to invoke.

If the argument is right thus far, HMRC go on to submit that if there is only one GAAP-compliant method which is available, but the company appears to have structured its transaction so as to exploit that method for tax purposes, the existence of the tax advantage (especially if notified under DOTAS) will be persuasive evidence that the method in question, even though GAAP-compliant, does not “fairly represent” the profits and gains which arise to the company from its loan relationships and related transactions.

As to the objection that such an interpretation is unworkable and unprincipled, because Parliament has not spelt out an alternative method of computing profit, HMRC submit that there is nothing arbitrary or fictional about the exercise on the facts of the present case. TPL obtained shares (agreed not to have been issued at a discount) with a par value of approximately £200 million from a “related transaction”. That is a “profit” within the meaning of section 84(1). (It would also be an accounting profit, if we were to find, in disagreement with the Tribunals below, that the accounting treatment proposed by HMRC’s expert was also GAAP-compliant: the case would then be one of the type discussed at [83] above).

Discussion and conclusions

In evaluating these submissions, it is logical to begin with the construction of section 84(1). Are HMRC correct to say that the “fairly represent” requirement is an overriding provision which permits consideration of wider criteria than GAAP, or does it merely have the limited attribution function for which TPL contends?

I begin by observing that we must construe the section as it stood in 2006/07, in the context of the loan relationship legislation as a whole including the amendment to section 85A(1) introduced by FA 2006 with effect from 19 July 2006. The relevant principle is stated as follows in Bennion on Statutory Interpretation, 7^th Edition, at section 6.7 on page 201:

The original wording, however, may be used as an aid to interpreting the meaning of words that are unaltered.”

As I have already explained, the purpose of the 2006 amendment to section 85A(1), which was introduced as part of a package of anti-tax avoidance measures, must have been to make it clear, for the avoidance of any doubt which might otherwise have arisen, that the fair representation requirement in section 84(1) was a separate and overriding condition which had to be satisfied in computing the credits and debits to be brought into account by a company in respect of its loan relationships.

The fact that it was an overriding requirement (whatever its precise content may have been) is clear from the express subjection of section 85A(1) to the provisions of section 84(1). The fact that it was also a separate requirement is apparent for at least two different reasons.

First, section 84(1) expressly requires consideration of the profits, gains and losses (and the interest, charges and expenses) which arise to the company for the accounting period in question “from its loan relationships and related transactions” (my emphasis), whereas the focus of sections 85A and 85B is exclusively on the amounts to be brought into account by the company itself, in accordance with either GAAP or substituted “correct accounts”. Thus section 84(1) requires a synoptic view to be taken of each relevant loan relationship in conjunction with “any disposal or acquisition (in whole or in part) of rights or liabilities under that relationship” (that being the definition of “related transaction” in section 84(5)). There is no equivalent of this wider focus to be found in sections 85A and 85B.

Secondly, there would have been little point in expressly making section 85A(1) subject to section 84(1) if Parliament had intended that the fair representation requirement should always be assessed by reference to the same accounting criteria as those mandated by sections 85A and 85B. The scope of the requirement was doubtless more limited before the 2004 amendments to section 84(1), because it then formed part of a single composite test which had to be applied “in accordance with an authorised accounting method”; but even then, as the observations of Lord Walker in DCC Holdings make clear, the words “fairly represent” had a distinct role to play as part of the overall assessment. That role can only have been enhanced when the link to an authorised accounting method was removed in 2004, leaving fair representation alone as the governing concept.

I am also wholly unpersuaded by TPL’s submission that the requirement had only a limited attribution function. No support for giving such a meagre content to the requirement may be found in the wording of the section itself, or in the authorities. Indeed, such an interpretation would appear to be in conflict with the approach adopted both by Lord Walker, and by Moses and Rix LJJ, in DCC Holdings. It would also rob the 2006 amendment to section 85A(1) of any significant content, and reduce it to a mere statement of the obvious in a context where Parliament was deliberately introducing a package of anti-avoidance measures. Finally, the attribution functions relied upon by TPL are in my view anyway implicit in the provisions of sections 85A and 85B themselves, and therefore did not need to be the subject of separate provision.

The objection that Parliament would have formulated specific guidance on the application of the fair representation test, if it was intended to be an overriding requirement of a substantive nature, is at first sight more compelling, particularly when it is remembered that the test was until 2004 explicitly linked to “an authorised accounting method”. Nevertheless, I do not think that the objection is well-founded, although it was persuasively advanced by Mr Ghosh. The concept of fairness is central both to the development and application of accounting standards, and to any process of judicial appraisal by a court or tribunal. In itself, the concept needs no elucidation, but rather provides a touchstone which is well suited to application by accountants, lawyers and judges, bringing their professional experience and expertise to bear in widely differing factual contexts.

Moreover, as Mr Milne pointed out, basic concepts such as profit or gain have traditionally not been the subject of detailed statutory provision in UK tax law, but have rather been left to the courts to develop, subject to specific statutory intervention from time to time. Thus, for example, the charge to income tax under Schedule D on the profits of a trade was for well over a century unencumbered with statutory definitions, and it was left to the courts to develop the applicable principles in computing profits for tax purposes. As a specific example of this process, Mr Milne referred to the rule in Sharkey v Wernher(1955) 36 TC 275, [1956] AC 58, where the House of Lords decided that when a trader appropriates an item of trading stock for personal use or consumption, the transaction must be accounted for at market value in the books of the trade. In preferring this solution to bringing the transaction into account at cost value, Lord Radcliffe said, at 84 to 85, that market value “gives a fairer measure of assessable trading profit” and was “better economics”. Similarly, in my judgment, an assessment of the kind required by section 84(1) is one which courts and tribunals are well qualified to perform without further specific statutory guidance. Accounting standards and practice will of course always be central to the exercise, but they are not conclusive, particularly where “related transactions” are in issue.

Furthermore, as so often, the proof of the pudding is in the eating of it. It is notable that in the present case neither Tribunal felt any conceptual difficulty in applying the test to the facts, and concluding that it required the accounting treatment of the assignments in the books of TPL to be overridden.

Once the overriding nature of the fair representation test is recognised, the remainder of the analysis seems to me to fall into place without difficulty. Looking in the round at each Claim and the assignment of it by TPL to TRAIL in return for shares in TRAIL of equivalent value, I see no difficulty in concluding that a profit or gain of a capital nature thereby arose to TPL from the disposal of the Claim, and that such profit or gain can only be fairly represented by a loan relationship credit in the hands of TPL equal to the value of the Claim at the date of the disposal. In this way, the profit or gain is brought into charge to tax at the same value as is recognised for accounting purposes in the hands of TRAIL, and a symmetrical outcome is assured. The alternative treatment, based solely on the GAAP-compliant treatment of the transactions in the books of TPL, would not “fairly represent” the profit or gain arising to TPL because it would lead to the value received by TPL in return for the Claims falling out of any charge to tax at all in the hands of either TPL or (by virtue of its non-UK tax resident status) TRAIL. Parliament could not rationally have intended such an outcome, and application of the fair representation test is in my opinion the appropriate means by which it is prevented.

On any view, the assignment of each Claim by TPL involved the disposal of a valuable asset by TPL for a consideration in money’s worth in the form of shares in TRAIL. Whether the disposal is properly to be characterised as a sale or an exchange or an assignment for valuable consideration does not seem to me to matter. The important point is that TPL disposed of one asset (the Claim) in return for another asset (shares in TRAIL of equivalent value). The disposal may not (on the findings of the FTT, upheld by the Upper Tribunal) have involved a realisation of the Claims which had to be recognised in accordance with GAAP; but the distinction between a sale of the Claims for money, which would admittedly have amounted to a realisation for accounting purposes, and a disposal for money’s worth, which apparently would not, is at best a fine one. In each case, the asset disposed of passes from the ownership of TPL to a third party, and in each case equivalent value is received in return. Further, although the Claims remained under the indirect control of TPL, through its ownership of TRAIL, the legal structure through which that control was exercised was completely different, as were the methods by which TPL could obtain the economic benefits of the Claims in the future (whether by sale of the shares in TRAIL, or by receipt of dividends out of TRAIL’s distributable profits, or on a liquidation of TRAIL). Taking all these matters into account, TPL can in my view fairly be regarded as having made a profit or gain on the disposals, even if it was not a profit or gain which UK GAAP required to be recognised.

In my view, an analysis along these lines is what the FTT must have had in mind when they described the Claims as having been “monetised when they were exchanged for shares in TRAIL”. I see nothing wrong with such a description, provided that it is so understood.

Nor am I deflected from this conclusion by TPL’s arguments that HMRC’s real complaint is about the non-resident status of TRAIL, and that the scheme could not have succeeded if TRAIL were UK-resident because of the operation of paragraph 12 of schedule 9 to FA 1996. In the first place, it is the position of TPL with which we are primarily concerned, and the computation of the credits arising from its loan relationships in the shape of the Claims. Secondly, since as a matter of commercial reality TPL disposed of the Claims in return for shares of equivalent value, the relevant question is how the value arising to TPL from that transaction should be fairly represented under section 84(1). It is at this stage that the accounting treatment of the transactions in the books of TRAIL becomes relevant, together with the need for a symmetrical solution in order to prevent tax avoidance. Thirdly, the fact that paragraph 12 of schedule 9 would effectively have countered the scheme if TRAIL were a UK-resident subsidiary seems to me to tell against, not in favour of, TPL’s argument. It shows that, in a purely domestic context, Parliament did not intend related transactions between companies that are members of the same group to affect the taxability of accrued but unrealised profits or gains referable to the relevant loan relationship. Consistently with that policy, Parliament cannot have intended that the transfer of a loan relationship to a non-UK tax resident subsidiary should lead to the accrued value of the loan relationship at the date of the transfer falling out of charge to tax in the hands of either the transferor or the transferee. That objective is achieved if the transferee is UK-resident and takes over the transferor’s carrying value. Such a solution is not available if the transferee is non-resident and outside the charge to CT, but Parliament must have intended that a similar result should if possible be achieved by other means.

For all these reasons, I consider that the FTT and the Upper Tribunal were correct to conclude that the credits which had to be brought into account by TPL in respect of the Claims in the two relevant accounting periods were the sums shown as the value of the consideration shares in the assignments, and not a nil amount. Although my reasoning is not entirely the same as that of the two Tribunals, I consider that in substance they came to the right conclusion on this issue, and (if the other members of the court agree) that TPL’s appeal must therefore be dismissed.

The conclusion which I have reached on the section 84(1) issue means that it is unnecessary to give further consideration to the accounting issues and the contentions raised by HMRC in their respondent’s notice. Since an appeal to this court from the Upper Tribunal lies only on questions of law, HMRC would face obvious difficulties in seeking to overturn the conclusions of both Tribunals on what are to a large extent questions of fact and the evaluation of expert evidence. Mr Milne was of course fully alive to this difficulty, and he valiantly sought to persuade us that at least some clear errors of law could be identified in the reasoning and approach of the Upper Tribunal to the accounting issues. Without formally deciding the matter, I will content myself with saying that, in my judgment, none of the arguments advanced by HMRC came close to persuading me that any material error of law could be identified in the Upper Tribunal’s treatment of the accounting issues.

Accordingly, for the reasons which I have given, I would dismiss the appeal.

I agree

I also agree.