Corporation tax - Taxpayer company claiming deduction in respect of loan relationship debit

MJP Media Services Ltd v Revenue and Customs Commissioners: Upper Tribunal (Tax and Chancery Chamber) (Mr Justice Arnold): 2 September 2011

During the period in question, the taxpayer company was a wholly-owned subsidiary of ‘Carat’ and Carat was a wholly-owned subsidiary of ‘Aegis’. The companies used the accruals basis of accounting. Between 2001 and 2004 a series of inter-company transactions took place between the taxpayer and Aegis. By 1 January 2004, Aegis owed the taxpayer £6,815,366.

At some date between 1 January and 26 March 2004, the taxpayer and Aegis signed a document stating that the taxpayer had loaned Aegis the sum of £6,815,366 (the agreement). The agreement was not dated, but was stated to be made effective from 1 January 2004. Interest was to be charged at base rate plus 1%. By 26 March 2004 Aegis owed the taxpayer £6,893,977, being £6,815,366 plus accrued unpaid interest of £78,611. On 26 March 2004, the taxpayer and Aegis signed a deed of waiver in which the taxpayer waived the sum of £6,704,000. That left an amount owing of £189,976.

The taxpayer claimed a deduction in its 2004 corporation tax computation for £6,690,000, being the waived amount reduced by a foreign exchange difference of £14,000. There were two issues before the first-tier Tribunal (the tribunal). First, as the taxpayer submitted, whether the inter-company debt arose from ‘transaction[s] for the lending of money’, so as to fall within the definition of a loan relationship in section 81 of the Finance Act 1996 (the 1996 act). Secondly, if a loan relationship subsisted, whether the taxpayer’s waiver of part of that loan allowed it to claim a deduction in its tax computation for the waived amount. The tribunal decided both issues adversely to the taxpayer, which appealed.

The taxpayer’s primary case was that the Tribunal’s conclusion that it had failed to prove that cash payments had been made by it to Aegis was not one which was open to it on the evidence. The appeal would be dismissed.

In the circumstances, where it had done so, the tribunal had been entitled to resort to the burden of proof in making its decision. The Revenue’s case, accepted by the tribunal, was that the taxpayer had taken over Aegis’ debt to Carat in exchange for cancelling Carat’s own debt, with the consequence that no cash had passed from it to Aegis. The Revenue argued that, if the first two transfers had been made by book entries, which it had been able to establish, then it followed that the third transfer must have been made by book entry as well. The Tribunal accepted the Revenue’s case. On the evidence, that was a conclusion which the Tribunal had been entitled to reach on the evidence before it (see [22], [29], [33], [36]-[37] of the judgment).

Stephens v Cannon [2005] All ER (D) 218 (Mar) applied; Procter & Gamble UK v Revenue and Customs Comrs [2009] All ER (D) 177 (May) considered; MA (Somalia) v Secretary of State for the Home Department [2010] All ER (D) 258 (Nov) considered.

David Goldberg QC and Hui Ling McCarthy (instructed by Berwin Leighton Paisner LLP) for the taxpayer. David Ewart QC and James Rivett (instructed by the Revenue and Customs commissioners) for the Revenue.