On 11 August 2015, the First-tier Tribunal (in GDF Suez Teeside Ltd v HMRC1) held that a taxable profit arose on a transfer of loan relationships from a UK parent company to its subsidiary even though it was accepted that under GAAP-compliant accounting treatment no profit was recognised.
The consideration for the loan relationships transfer was the issue of shares in the Jersey incorporated and tax resident subsidiary. The fair value of the consideration shares was equal to the aggregate fair value of the loan relationships.
Although the Tribunal accepted that the UK taxpayer’s accounts were GAAP compliant, the “general rule” under the UK’s loan relationship tax regime (that amounts brought within the charge to tax are those recognised in accordance with GAAP) can be overridden where the absence of an accounting profit does not “fairly represent” a taxpayer’s profit for tax purposes.
This was perhaps not a surprising conclusion, not least because (in the words of the Tribunal) what was being considered was a “tax planning scheme” and a “structured transaction in which accounting rules have been used in order to both defer tax and potentially remove profits from the UK tax net”.
The Tribunal also remarked that it had, in essence, used the “fair representation” override as an anti-avoidance rule, and that this was in line with the loan relationship regime as it will apply once the Finance Bill 2015 changes take effect (removing the “fair representation” stipulation with effect from 1 January 2016) and replacing it with a new anti-avoidance rule.
The decision can be found here.