Introduction

The case of Travel Document Service & Anor v. Revenue & Customs ([2017] BTC 505) addressed intricate issues surrounding corporation tax and tax avoidance schemes. The appellants, Travel Document Service (TDS) and Ladbroke Group International (LGI), employed a sophisticated financial arrangement involving total return swaps and novation of substantial loans to manipulate the valuation of shares in their subsidiary. This maneuver aimed to create a deemed creditor relationship, thereby extracting reserves and claiming significant tax-related debits. The Upper Tribunal (Tax and Chancery Chamber) ultimately dismissed the appeals, upholding the First-Tier Tribunal's decision that HMRC was correct in disallowing the claimed debits under section 91B of the Finance Act 1996 (FA96).

Summary of the Judgment

The appellants, TDS and LGI, part of the Ladbroke Group, initiated a tax avoidance scheme orchestrated by Deloitte LLP. The scheme involved using total return swaps on shares in LGI to create a deemed loan relationship. By doing so, they sought to devalue the shares through the novation of liabilities tied to large loans to a subsidiary. This devaluation allowed them to claim substantial non-trading loan relationship debits for corporation tax purposes, amounting to £253,939,631 for TDS and additional debits for LGI. The First-Tier Tribunal (Tax) initially dismissed these appeals, agreeing with HMRC that the debits were disallowed based on the "unallowable purpose" rule in paragraph 13 of Schedule 9 FA96. TDS and LGI appealed this decision, but the Upper Tribunal upheld the initial ruling. The Tribunal concluded that the primary purpose behind the transactions was to secure a tax advantage, thereby rendering the debits unallowable under the existing legislation.

Analysis

Precedents Cited

The judgment references several key precedents that influenced the court's decision:

• Marshall v Kerr [1994] STC 638: This case established that in interpreting demeaning provisions, courts should not extend beyond the necessary to effectuate the legal fiction and its inherent consequences.
• Fidex Ltd v Commissioners for HMRC [2016] EWCA Civ 385: Here, the Court of Appeal reaffirmed that debits arising from tax avoidance schemes could be wholly attributable to unallowable purposes, reinforcing the application of paragraph 13 of Schedule 9 FA96.

Legal Reasoning

The crux of the Tribunal's legal reasoning hinged on the interpretation and application of section 91B of FA96, particularly focusing on paragraph 13 of Schedule 9 FA96. The key points include:

• Applicability of Paragraph 13 to Deemed Loan Relationships: The Tribunal held that paragraph 13 could apply to deemed loan relationships, such as TDS's shareholding in LGI, by assessing the company's purposes in maintaining the deemed relationship.
• Unallowable Purpose: The Tribunal found that one of TDS's main purposes in engaging in the swap and novations was to secure a tax advantage, thereby constituting an unallowable purpose under paragraph 13(2) of Schedule 9 FA96.
• Attribution of Debits: The debits claimed were wholly attributable to the unallowable purpose of the tax avoidance scheme. Alternative methods of extracting reserves, which TDS and LGI argued could have been used, were deemed irrelevant as the chosen method was specifically for tax advantage.
• Impact of Transactions Timing: The timing of debits, whether incurred during or after the novations, did not negate their attribution to the unallowable purpose.
• Tax Advantage for Another Party: The Tribunal clarified that it suffices that the unallowable purpose was intended to secure a tax advantage for another person, without needing to demonstrate that the advantage was actually realized.

Impact

This judgment has significant implications for future tax avoidance schemes involving financial instruments like total return swaps and the manipulation of deemed relationships. Key impacts include:

• Clarification of FA96 Provisions: The decision elucidates the scope and application of section 91B and paragraph 13 of Schedule 9 FA96, providing clearer guidelines for both tax authorities and taxpayers.
• Strengthening Anti-Avoidance Measures: By upholding the disallowance of debits arising from unallowable purposes, the Tribunal reinforces the government's stance against complex tax avoidance strategies.
• Precedent for Deemed Relationships: The acceptance that paragraph 13 applies to deemed loan relationships sets a precedent that these artificial constructs are susceptible to anti-avoidance rules if they serve unallowable purposes.
• Impact on Financial Structuring: Companies may reconsider or restructure financial arrangements that could be interpreted as aimed at securing tax advantages, mitigating the risk of disallowed debits.

Complex Concepts Simplified

Total Return Swap

A total return swap is a financial derivative contract where one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both income and capital appreciation. In this case, TDS entered into a swap over shares in LGI to manipulate their valuation for tax purposes.

Deemed Loan Relationship

Under FA96, certain shareholdings can be treated as loan relationships for tax purposes. This means that the shares are treated similarly to loans, with debits and credits determined based on their fair value, as if there were an actual creditor-loan relationship.

Novation

Novation is the replacement of one party in a contract with another, or the replacement of one contractual obligation with another. In this context, the novation of loans involved transferring the obligation from TDS to LGI, effectively devaluing the shares in LGI.

Unallowable Purpose

An unallowable purpose, in tax terms, refers to a purpose for which tax reliefs or allowances are not granted, often because they are primarily aimed at securing a tax advantage rather than furthering legitimate business activities.

Paragraph 13 of Schedule 9 FA96

This provision stipulates that if a loan relationship has an unallowable purpose during an accounting period, the related debits and credits cannot be included in the tax computations. Essentially, it prevents taxpayers from claiming tax benefits arising from transactions designed to avoid tax.

Conclusion

The Upper Tribunal's decision in Travel Document Service & Anor v. HMRC serves as a robust affirmation of the HMRC's authority to target and disallow complex tax avoidance schemes. By meticulously applying the provisions of FA96, particularly paragraph 13 of Schedule 9, the Tribunal underscored the importance of genuine business purposes over artificial financial arrangements designed solely for tax advantages. This judgment not only clarifies the application of tax laws to deemed relationships and financial derivatives but also acts as a deterrent against the use of sophisticated financial instruments for tax avoidance. Companies must now exercise greater caution in structuring transactions, ensuring that their primary objectives align with legitimate business activities rather than tax minimization through potentially contentious financial maneuvers.