Lord Justice Newey:
- This case arises out of a tax avoidance scheme in which the appellants, Travel Document Service ("TDS") and Ladbroke Group International ("LGI"), participated in 2008. TDS and LGI claimed debits in respect of the scheme (of more than £253 million in the case of TDS, some £12 million in the case of LGI) on the basis of the provisions in respect of "loan relationships" then to be found in the Finance Act 1996 ("FA 1996"). The debits having been disallowed by HM Revenue and Customs ("HMRC"), TDS and LGI appealed to the First-tier Tribunal ("the FTT") (Judge Kevin Poole and Mr Julian Sims FCA CTA), but the appeals were dismissed and the Upper Tribunal (Arnold J and Judge Timothy Herrington) subsequently agreed with the FTT. TDS and LGI now challenge the Upper Tribunal's decision in this Court.
- TDS and LGI both belong to the Ladbroke group of companies ("the Group"). At the relevant times, TDS was a subsidiary of Ladbrokes plc, the Group's parent company, and itself owned LGI. LGI in turn held the shares in a company with two trading subsidiaries, Jack Brown (Bookmaker) Limited ("JBB") and Ladbrokes Call Centre Limited ("LCC"). JBB was the lessee of numerous properties and LCC provided call centre services. As at 31 December 2007, LGI had an accumulated surplus of some £272 million.
- The principal operating company of the Group was Ladbrokes Betting and Gaming Limited ("LBG"), another subsidiary of Ladbrokes plc. It had as a subsidiary Ladbrokes (Northern Ireland) (Holdings) Limited ("LNIH"), which itself owned a company based in Northern Ireland, North West Bookmakers Limited ("NWB").
- The Group had amongst its aims shortening its ownership chains, reducing the number of active UK subsidiaries and merging their businesses into LBG. To this end, it aspired to transfer the JBB business to LBG. At one stage, the Group envisaged transferring LCC's business to LBG as well, but it became apparent that that business was unlikely to have a long life.
- By late January 2008, the Group had been approached by Deloitte with a proposal for a scheme to generate a substantial tax advantage while also allowing (a) LBG to gain the benefit of JBB's business in economic terms without the need to transfer all the leases that the latter held and (b) LGI's reserves to be extracted from it. The scheme was implemented using another subsidiary of TDS, Sponsio Limited ("Sponsio").
- The following transactions were entered into:
i) On 26 February 2008, Sponsio subscribed for some shares in LGI;
ii) On 28 February 2008, Sponsio borrowed £143,600,000 from Ladbrokes Group Finance plc ("LGF"), the principal financing company for the Group. Sponsio used £23,600,000 of the money to acquire LNIH from LBG and lent the remaining £120 million to LNIH. LNIH in turn made a loan of £120 million to NWB;
iii) On 29 February 2008, TDS entered into a total return swap ("the Swap") with LBG over the shares the former held in LGI. This had a maximum term of five years but could be terminated earlier. In broad terms, it provided for LBG to pay TDS interest on the fair value of the LGI shares at the date of the Swap in return for TDS paying LBG an amount equal to the increase in the fair value of the LGI shares, thereby achieving a "synthetic" transfer of the JBB business. The Swap was thought to be desirable both to "buy time" to address issues relating to the JBB leases and because of the tax advantage that it could potentially enable the Group to obtain;
iv) On 6 March 2008, LBG decided to pay an interim dividend of £110 million. On the same day, Sponsio borrowed £110 million from LGF, and it lent this sum on to LBG;
v) On 11 March 2008, Sponsio novated its rights and obligations under its loans from LGF of £143,600,000 and £110 million (plus accrued interest) to LGI for nominal consideration. The Group had first received advice from Slaughter and May that the intended tax advantage should be available in consequence of the novations ("the Novations"). Mr Philip Turner, the Group's head of tax and strategic planning and a director of TDS, told the FTT that, without that comfort, LGI would have distributed its reserves by a more "straightforward" dividend route;
vi) On 23 May 2008, the JBB business was sold to LBG; and
vii) On 30 May 2008, the Swap was terminated. TDS paid LBG £648,555 by way of termination payment.
- The key to the scheme, as the Upper Tribunal noted (paragraph 9 of its decision), was the reduction in the fair value of TDS's shareholding in LGI as a result of the latter taking on indebtedness of more than £253 million pursuant to the Novations. On the strength of this devaluation, TDS claimed a debit of £253,939,631 under section 91B of FA 1996.
- For its part, LGI claimed debits in its 2008 and 2009 accounting periods in respect of the interest it paid on the novated loans.
- A helpful diagram indicating the structure of the Group and the transactions into which its companies entered is to be found as an appendix to the FTT decision.
The legislative framework
- Section 91B of FA 1996 formed part of Chapter II of Part IV of the Act. As its heading indicated, Chapter II of Part IV, which encompassed sections 80 to 105, was concerned with "loan relationships". The legislation has since been superseded, but during the period relevant to this case section 80(1) stated that, for the purposes of corporation tax, all profits and gains arising to a company from its loan relationships were to be chargeable to tax as income in accordance with Chapter II of Part IV.
- The term "loan relationship" was explained in section 81(1) of FA 1996. This provided for a company to have a "loan relationship" wherever:
"(a) the company stands (whether by reference to a security or otherwise) in the position of a creditor or debtor as respects any money debt; and
(b) that debt is one arising from a transaction for the lending of money".
- Section 84 of FA 1996 dealt with "Debits and credits brought into account". Section 84(1) stipulated:
"The credits and debits to be brought into account in the case of any company in respect of its loan relationships shall be the sums which, when taken together, fairly represent, for the accounting period in question—
(a) 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
(b) all interest under the company's loan relationship and all charges and expenses incurred by the company under or for the purposes of its loan relationships and related transactions."
Section 84(7) added:
"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."
- Paragraph 13 of schedule 9 to FA 1996 was headed "Loan relationships for unallowable purposes". Given its importance in the present case, I should set it out quite fully. It was in the following terms:
"(1) Where in any accounting period a loan relationship of a company has an unallowable purpose,
(a) the debits, and
(b) the credits in respect of exchange gains,
which, for that period fall, in the case of that company, to be brought into account for the purposes of this Chapter shall not include so much of the debits or credits (as the case may be) as respects that relationship as, on a just and reasonable apportionment, is attributable to the unallowable purpose.
(2) For the purposes of this paragraph a loan relationship of a company shall be taken to have an unallowable purpose in an accounting period where the purposes for which, at times during that period, the company—
(a) is a party to the relationship, or
(b) enters into transactions which are related transactions by reference to that relationship,
include a purpose ('the unallowable purpose') which is not amongst the business or other commercial purposes of the company.
(3) For the purposes of this paragraph the business and other commercial purposes of a company do not include the purposes of any part of its activities in respect of which it is not within the charge to corporation tax.
(4) For the purposes of this paragraph, where one of the purposes for which a company—
(a) is a party to a loan relationship at any time, or
(b) enters into a transaction which is a related transaction by reference to any loan relationship of the company,
is a tax avoidance purpose, that purpose shall be taken to be a business or other commercial purpose of the company only where it is not the main purpose, or one of the main purposes, for which the company is a party to the relationship at that time or, as the case may be, for which the company enters into that transaction.
(5) The reference in sub-paragraph (4) above to a tax avoidance purpose is a reference to any purpose that consists in securing a tax advantage (whether for the company or any other person).
(6) In this paragraph 'tax advantage' has the meaning given by section 840ZA of the [Income and Corporation] Taxes Act 1988."
Section 840ZA of the Income and Corporation Taxes Act 1988, to which paragraph 13(6) of schedule 9 referred, defined "tax advantage" to include "a relief from tax or increased relief from tax".
- Reverting to Chapter II of Part IV of FA 1996, sections 91A to 91G had the heading, "Shares treated as loan relationships". This group of sections had been inserted into the Chapter by the Finance Act 2005. The explanatory notes relating to the provisions explained:
"These paragraphs deal with a number of schemes disclosed under Part 7 FA 2004 and elsewhere which exploit the fact that increases in value and gains from the disposal of shares are subject only to the rules for corporation tax on chargeable gains, if at all. The schemes use derivatives in conjunction with shares, or deferred subscription agreements to create what is in form a share but in economic substance a deposit or loan, since in most of them the risks associated with equity investments, as well as the rewards, are removed or significantly reduced, leaving the share giving a return, either by the payment of 'dividend' or by a wholly predictable increase in value, which is the type of return expected from debt."
- Section 91B of FA 1996 provided for shares to be treated as rights under a "creditor relationship" in certain circumstances. It stated:
"(1) This section applies for the purposes of corporation tax in relation to the times in a company's accounting period during which—
(a) the company ('the investing company') holds a share in another company ('the issuing company'),
(c) the share is a non-qualifying share (see subsection (6))….
(2) This Chapter shall have effect for that accounting period in accordance with subsection (3) below as if during those times—
(a) the share were rights under a creditor relationship of the investing company, and
(b) any distribution in respect of the share were not a distribution falling within section 209(2)(a) or (b) of the Taxes Act 1988.
(3) The debits and credits to be brought into account by the investing company for the purposes of this Chapter as respects the share must be determined on the basis of fair value accounting.
(4) In any case where Condition 1 in section 91C below is satisfied, in determining those debits and credits there are to be left out of account amounts in respect of any transaction (or series of transactions) which (apart from the assumption in subsection (6) of section 91C below) would have the effect of causing the condition in paragraph (a) or (b) of subsection (1) of that section not to be satisfied.
(5) In any case where Condition 3 in section 91E below is satisfied—
(a) debits and credits shall be brought into account for the purposes of Schedule 26 to the Finance Act 2002 (derivative contracts) by the investing company in respect of any associated transaction falling within section 91E below as if it were, or were a transaction in respect of, a derivative contract (if that is not in fact the case), and
(b) those debits and credits shall be determined on the basis of fair value accounting.
(6) A share is a non-qualifying share for the purposes of this section if—
(a) it is not one where section 95 of the Taxes Act 1988 (dealers etc) applies in relation to distributions in respect of the share, and
(b) one or more of the Conditions in sections 91C to 91E below is satisfied.
(7) Subsection (10) of section 91A above (company treated as holding a share) also applies for the purposes of this section…."
Under section 91A(10), to which there was reference in section 91B(7), a company was to be treated as continuing to hold a share notwithstanding that the share had been transferred to another person "under a repo or stock lending arrangement". By section 103, "creditor relationship" was defined as meaning, in relation to a company, "any loan relationship of that company in the case of which it stands in the position of a creditor as respects the debt in question".
- Sections 91C to 91E of FA 1996 specified the Conditions mentioned in section 91B(6)(b). Condition 1, set out in section 91C, was that:
"the assets of the issuing company are of such a nature that the fair value of the share—
(a) is likely to increase at a rate which represents a return on an investment of money at a commercial rate of interest, and
(b) is unlikely to deviate to a substantial extent from that rate of increase".
Condition 2, for which section 91D provided, was that:
(a) is redeemable (see subsection (2)),
(b) is designed to produce a return which equates, in substance, to the return on an investment of money at a commercial rate of interest, and
(c) is not an excepted share (see subsection (3))".
A share was, however, an "excepted share" for the purposes of the section if, among other things, "the investing company's purpose in acquiring the share [was] not an unallowable purpose". As for when an acquisition would have been for an "unallowable purpose", section 91D(9) stated:
"For the purposes of this section, a share is acquired by the investing company for an unallowable purpose if the purpose, or one of the main purposes, for which the company holds the share is—
(a) the purpose of circumventing section 95 of the Taxes Act 1988 (see subsection (10)), or
(b) any other purpose which is a tax avoidance purpose (see subsection (11))."
By virtue of section 91D(11), "tax avoidance purpose" signified "any purpose that consists in securing a tax advantage (whether for the company or any other person)", "tax advantage" once again bearing the meaning given in section 840ZA of the Income and Corporation Taxes Act 1988.
- With regard to Condition 3, section 91E of FA 1996 provided:
"(1) Condition 3 is that there is a scheme or arrangement under which the share and one or more associated transactions are together designed to produce a return which equates, in substance, to the return on an investment of money at a commercial rate of interest.
(3) In this section 'associated transaction' includes entering into, or acquiring rights or liabilities under, any of the following—
(a) a derivative contract…
(4) This section is to be construed as one with section 91B above."
Some common ground
- So far as the TDS appeal is concerned, it was common ground between the parties before the FTT (and still is) that:
i) The shares in LGI held by TDS became "non-qualifying shares" for the purposes of section 91B of FA 1996 when the latter company entered into the Swap. There was then a "scheme or arrangement" under which the shares and an "associated transaction" (i.e. the Swap) were "together designed to produce a return which equates, in substance, to the return on an investment of money at a commercial rate of interest" within the meaning of section 91E, so that Condition 3 was satisfied;
ii) Subject, therefore, to paragraph 13 of schedule 9, TDS was to bring debits and credits in respect of its shares in LGI into account under the loan relationship rules "on the basis of fair value accounting" in accordance with section 91B(3);
iii) If paragraph 13 of schedule 9 was not applicable, the debits claimed by TDS were appropriate; and
iv) One of the main purposes for which TDS entered into the Swap and approved the Novations was to secure a tax advantage.
- Turning to the LGI appeal, it was and remains common ground that, as a result of the Novations, LGI became a party to an actual loan relationship. Before the FTT, the parties differed as to whether LGI had been a party to the relationship for an "unallowable purpose", but the FTT held, and LGI does not now dispute, that it had such a purpose, in that one of its main purposes was to enable TDS to obtain a tax advantage.
The decisions of the FTT and Upper Tribunal
- The issue before the FTT as regards TDS was essentially whether the company was barred from bringing the debits it claimed into account by paragraph 13 of schedule 9 to FA 1996. It was TDS's case that paragraph 13 had no application to loan relationships deemed to exist under section 91B and that, even were that wrong, it did not have an "unallowable purpose". The FTT, however, decided otherwise. It held that paragraph 13 applied to a deemed loan relationship on the footing that "it is the company's purposes in bringing about and maintaining the satisfaction of the conditions in s 91B(1) which are the relevant purposes to be tested against para 13(2)" (paragraph 59 of the FTT decision). Approaching matters in this way, the FTT said this (in paragraph 67):
"We therefore have no difficulty in finding that one of TDS's main purposes in entering into the Swap whilst holding the shares in LGI was a tax avoidance purpose, and that continued to be the case until the Swap was finally terminated. As such, … we consider that TDS had an unallowable purpose throughout that period for the creditor relationship it was deemed to have by reason of s 91B(2) [of FA 1996]."
- The FTT went on:
" If we are wrong in the view expressed at , above, however, and the appropriate purposes to be examined are (as both Ms Shaw [who was appearing for TDS and LGI] and Mr Ghosh [HMRC's counsel] submitted) those of TDS in holding the LGI shares, then we agree with Mr Ghosh. It is quite clear that a company's purposes for the existence of a particular state of affairs can change over time…. The fact that TDS may have had a perfectly sound business and commercial purpose in holding the LGI shares throughout the whole period in question does not alter the fact that its hoped-for use of those shares for the purposes of obtaining the debits meant that it also had another main tax avoidance purpose in holding those shares from the time when the Swap was entered into until the time when the Novations were effected; this conclusion is inescapable, given Mr Turner's perfectly fair and understandable (indeed, one might say inevitable) admission that there was a main tax avoidance purpose for entering into the Swap. We discount entirely Ms Shaw's submission that a purpose of saving some £70m of tax could not be counted as a 'main' purpose when set in the context of a company worth some £280m. Clearly it could and, in our view, did.
 Therefore we would still hold that para 13(1) [of schedule 9 to FA 1996] applies as above, even if our view expressed at , above is wrong."
- The FTT thus concluded (in paragraph 72 of its decision) that "all the debits in TDS are excluded by operation of para 13(1)".
- Turning to LGI's position, having found the relevant loan relationship to have had an unallowable purpose, the FTT considered "the extent to which the debits are attributable to that unallowable purpose, on a just and reasonable apportionment" (paragraph 78 of the decision). It decided that the debits should be disallowed in full (paragraph 82).
The Upper Tribunal
- The Upper Tribunal held that paragraph 13 of schedule 9 to FA 1996 was applicable to a deemed loan relationship on the basis that the FTT addressed in paragraph 69 of its decision. Rejecting arguments advanced on behalf of TDS, the Upper Tribunal said (in paragraph 33 of its decision):
"We agree with counsel for HMRC that there is no conceptual or practical difficulty in identifying the subjective purposes of a party to the deemed loan relationship: one applies the test to the real-world transaction with its real-world rights and liabilities as if it was a loan relationship. This is possible whether the situation involves share ownership or a repo or stock lending arrangement. In the present case, this simply required the First-Tier Tribunal to consider the purposes for which TDS held the shares in LGI during the relevant period."
The Upper Tribunal did not, in the circumstances, need to consider the FTT's preferred approach (as to which, see paragraph 20 above).
- As to whether, on the facts, TDS had an "unallowable purpose", the Upper Tribunal said this (in paragraph 37 of its decision):
"The First-Tier Tribunal found as a fact that one of TDS's main purposes in holding the shares in LGI during the period of the Swap was to secure a tax advantage. The First-Tier Tribunal was fully entitled to make that finding on the evidence before it. The fact that TDS had a valid commercial purpose in owning the shares before, during and after the Swap did not preclude the First-Tier Tribunal from finding that, during the period of the Swap, TDS had an additional purpose in owning them. The use to which an asset is put is perfectly capable, in appropriate circumstances, of shedding light on the owner's purpose in owning that asset. This is such a case. TDS entered into the Swap in order to make the shares it owned in LGI non-qualifying shares, and it entered into the Novations in order to depreciate the shares. Thus TDS's purposes in owning the shares during that period included the purpose of making them non-qualifying and then depreciating them, so as to secure a tax advantage. Mr Turner did not deny this. On the contrary, he was frank that one of TDS's main purposes in entering into the Swap and the Novations was to obtain the tax advantage."
- With regard to LGI's appeal, the Upper Tribunal did not accept the company's contentions and upheld the FTT's decision.
The TDS appeal
- The issues that arise on TDS's appeal can, as it seems to me, be summarised as follows:
i) Did paragraph 13 of schedule 9 to FA 1996 apply to deemed loan relationships?
ii) If paragraph 13 of schedule 9 to FA 1996 extended to deemed loan relationships, how was it to be applied?
iii) Was the FTT justified in concluding, on the facts, that TDS had an "unallowable purpose"?
- I shall take these points in turn.
Did paragraph 13 of schedule 9 to FA 1996 apply to deemed loan relationships?
- HMRC's case is that the FTT and Upper Tribunal were correct to conclude that paragraph 13 of schedule 9 to FA 1996 was applicable to the deemed loan relationships for which section 91B provided. Schedule 9 was applied to actual loan relationships by section 84(7). Section 84(7) did not, however, state that it was relevant only to true loan relationships, but rather that schedule 9 contained further provisions as to the debits and credits to be brought into account "for the purposes of this Chapter". By 2008, that Chapter included sections 91A to 91G, and section 91B(2) provided for "this Chapter" to "have effect". It follows, according to HMRC, that schedule 9 must have operated as regards the debits and credits to be brought into account in respect of the loan relationships deemed to exist by section 91B as well as real loan relationships.
- TDS, however, disputes that paragraph 13 of schedule 9 to FA 1996 had any application to deemed loan relationships. Mr Jonathan Peacock QC, who appeared with Miss Sarah Black for TDS and LGI, referred us to Marshall v Kerr  STC 638 for guidance as to how deeming provisions are to be approached. In that case, Lord Browne-Wilkinson endorsed this passage from the judgment of Peter Gibson J in the Court of Appeal ( STC 360, at 366):
"For my part I take the correct approach in construing a deeming provision to be to give the words used their ordinary and natural meaning, consistent so far as possible with the policy of the Act and the purposes of the provisions so far as such policy and purposes can be ascertained; but if such construction would lead to injustice or absurdity, the application of the statutory fiction should be limited to the extent needed to avoid such injustice or absurdity, unless such application would clearly be within the purposes of the fiction. I further bear in mind that because one must treat as real that which is only deemed to be so, one must treat as real the consequences and incidents inevitably flowing from or accompanying that deemed state of affairs, unless prohibited from doing so."
In the present case, Mr Peacock said, identifying a purpose in relation to a deemed loan relationship would "distort the real world more than was necessary to give effect to the purpose of the deeming provisions" (quoting from the judgment of Lewison LJ in DV3 RS Ltd Partnership v Revenue and Customs Commissioners  EWCA Civ 907,  STC 2150, at paragraph 22). As can be seen from the explanatory notes for what became the Finance Act 2005, section 91B was aimed at countering schemes which sought to convert what would otherwise be taxable interest into capital gains. That purpose, Mr Peacock submitted, could be achieved without importing paragraph 13 of schedule 9.
- In any event, Mr Peacock argued, there are conceptual and practical obstacles to determining the purpose for which someone is a party to a deemed state of affairs. The difficulties, Mr Peacock suggested, can be seen particularly in relation to repos. Section 91B(7) of FA 1996 provided for section 91A(10) to apply for the purposes of section 91B. Under section 91A(10), a company was to be treated as continuing to hold a share notwithstanding that it had been transferred to another person under a repo. How, Mr Peacock asked, could paragraph 13 of schedule 9 work in such a case? The approach favoured by the Upper Tribunal would result in the person's actual purposes in entering into the repo agreement, and thus no longer holding the relevant shares, being deemed to be his purposes for holding the shares and being a party to the deemed loan relationship, which (so Mr Peacock said) could not make sense.
- Mr Peacock also pointed to section 91D of FA 1996, which (like paragraph 13 of schedule 9) used the concept of an "unallowable purpose" (see paragraph 16 above). This, Mr Peacock submitted, provides a strong indication that paragraph 13 was not intended to apply to loan relationships deemed to exist pursuant to section 91B. Had Parliament envisaged that paragraph 13 would apply on top of the purpose test found in section 91D, it would have explained their interrelationship. The fact, moreover, that sections 91B, 91C and 91E did not contain any unallowable purpose test leads, Mr Peacock contended, to the inference that Parliament did not contemplate there being one with those provisions.
- Parliament, Mr Peacock maintained, can be seen to have intended both credits and debits to be brought into account in respect of deemed loan relationships (see e.g. section 91B(3) of FA 1996). Yet bolting paragraph 13 of schedule 9 onto the "Shares treated as loan relationships" provisions would mean that debits were disallowed in all or most instances.
- Mr Peacock advanced these submissions in a typically persuasive way, but I am not convinced by them. I agree with Mr Julian Ghosh QC, who appeared with Miss Elizabeth Wilson for HMRC, that, reading the relevant provisions naturally, paragraph 13 of schedule 9 to FA 1996 was to apply to deemed loan relationships. I do not consider, moreover, that the arguments put forward by Mr Peacock, taken either individually or together, show otherwise. While section 91B may have been aimed at schemes which sought to convert taxable interest into capital gains, in a broader sense it was designed to counter tax avoidance. That being so, it can hardly be supposed that Parliament wished the provision to be construed in such a way that it could be used as a vehicle for tax avoidance schemes. Further, the approach advocated by HMRC involves looking at real purposes of the company rather than extending the effect of the deeming for which section 91B provided. So far as repos are concerned, any problems that might arise with applying paragraph 13 to these do not warrant the conclusion that Parliament did not want paragraph 13 to operate in relation to deemed loan relationships generally. Nor again does section 91D's use of "unallowable purpose". While it might have been preferable for Parliament to spell out more explicitly what it intended with respect to paragraph 13 when enacting the "Shares treated as loan relationships" provisions, the point is double-edged: after all, were Parliament not to have wanted paragraph 13 to be applicable, it could have been expected to make that clear rather than (as I say) producing legislation which, on its face, suggests that paragraph 13 applied. As regards, finally, the suggestion that Parliament intended debits, as well as credits, to be brought into account, some could be even on Mr Ghosh's case. Debits would not be disallowed under paragraph 13 unless the loan relationship in question had an "unallowable purpose", and section 91B was capable of encompassing situations where there was no such purpose.
- In short, I consider that the FTT and Upper Tribunal were right to take the view that paragraph 13 of schedule 9 to FA 1996 applied to deemed loan relationships.
If paragraph 13 of schedule 9 to FA 1996 extended to deemed loan relationships, how was it to be applied?
- The next question is how paragraph 13 of schedule 9 to FA 1996 was to be applied in the case of a deemed loan relationship.
- Paragraph 13(2) of schedule 9 to FA 1996 provided that a loan relationship was to be taken to have an unallowable purpose "where the purposes for which … the company … is a party to the relationship … include a purpose … which is not amongst the business or other commercial purposes of the company". In the case, therefore, of a conventional loan relationship (where the company stands in the position of a creditor or debtor as respects a money debt), the focus was on the purposes for which the company was a party to that relationship. Under section 91B, shares held by a company were treated as if they were "rights under a creditor relationship of the investing company" (see section 91B(2)). The real-world shareholding relationship was thus equated with that of creditor and debtor. It follows, Mr Peacock argued, that the "purposes for which … the company … is a party to the relationship" must have been those for which it held the relevant shares. Before the FTT, Mr Ghosh also approached matters on that basis, and the Upper Tribunal likewise looked to the purposes for which TDS held its shares in LGI during the relevant period (see paragraph 24 above).
- The FTT, in contrast, considered that the company's purposes "in bringing about and maintaining the satisfaction of the conditions in s 91B(1)" were what mattered (see paragraph 20 above). To my mind, that was a misconception. Paragraph 13 of schedule 9 to FA 1996 directed attention to the purposes for which the company was a party to the loan relationship. In a section 91B case, the relationship deemed to constitute such a relationship was that between an "investing company" and the company in which it held shares. It must therefore be correct to ask for what purposes the company was a party to that relationship or, in other words, for what purposes it held the relevant shares rather than what the company's purposes were "in bringing about and maintaining the satisfaction of the conditions in s 91B(1)".
- In the present case, accordingly, the question to be answered was whether the purposes for which TDS held shares in LGI during the currency of the Swap included an "unallowable purpose" within the meaning of paragraph 13 of schedule 9 to FA 1996.
Was the FTT justified in concluding, on the facts, that TDS had an "unallowable purpose"?
- It is clear, I think, from paragraphs 69-70 of its decision (quoted in paragraph 21 above) that the FTT found that TDS had an "unallowable purpose" for holding its shares in LGI and, hence, being a party to the loan relationship that section 91B of FA 1996 deemed to exist. Was it justified in arriving at that conclusion?
- The following points bear, as it seems to me, on when a company should be considered to have held shares for an "unallowable purpose":
i) A company had an "unallowable purpose" if its purposes included one that was "not amongst the business or other commercial purposes of the company" (see paragraph 13(2) of schedule 9 to FA 1996);
ii) A tax avoidance purpose was not necessarily fatal. It was to be taken to be a "business or other commercial purpose" unless it was "the main purpose, or one of the main purposes, for which the company is a party to the relationship" (see paragraph 13(4));
iii) It was the company's subjective purposes that mattered. Authority for that can be found in the decision of the House of Lords in Inland Revenue Commissioners v Brebner  2 AC 18, which concerned a comparable issue, viz. whether transactions had as "their main object, or one of their main objects, to enable tax advantages to be obtained". Lord Pearce concluded (at 27) that "[t]he 'object' which has to be considered is a subjective matter of intention", and Lord Upjohn (with whom Lord Reid agreed) said (at 30) that "the question whether one of the main objects is to obtain a tax advantage is subjective, that is, a matter of the intention of the parties"; and
iv) When determining what the company's purposes were, it can be relevant to look at what use was made of the shares. As the Upper Tribunal (Barling J and Judge Charles Hellier) noted in Fidex v HMRC  UKUT 454 (TCC),  STC 702 (at paragraph 110):
"what you do with an asset may be evidence of your purpose in holding it, but it need not be determinative of that purpose. The benefits you hope to derive as a result of holding an asset may also evidence your purpose in holding it".
- In the present case, as Mr Peacock stressed, there was evidence before the FTT from Mr Turner as to the purposes for which TDS held its LGI shares. This sought to distinguish TDS's reasons for proceeding with the Swap (and the Novations) from its purposes in holding the LGI shares. Thus, Mr Turner said in his witness statement:
"As I will explain below, whatever the main purpose or purposes of the [Swap] and loan novations, the only purpose of TDS in holding the shares in LGI was, is and always has been for bona fide commercial reasons.
… It has never been suggested that LGI was anything other than an ordinary subsidiary of TDS. In fact, HMRC have accepted, at least up until the events with which this appeal is concerned, that TDS held the shares in LGI for bona fide commercial reasons alone. Nothing changed in that respect when the Group decided to enter into the [Swap] – at no point did TDS consider disposing of its shares in LGI and so at no point did it consciously formulate any other purpose for holding the shares."
- These passages were not the subject of any direct challenge when Mr Turner was cross-examined. That being so, Mr Peacock submitted that it was not open to HMRC to contend, or to the FTT to find, that TDS had held the LGI shares for a "unallowable purpose". In this context, Mr Peacock relied on Markem Corpn v Zipher Ltd  RPC 31, where the Court of Appeal cited from the obscurely-reported decision of the House of Lords in Browne v Dunn (1894) 6 R 67 via an Australian decision, Allied Pastoral Holdings Pty Ltd v Federal Comr of Taxation 44 ALR 607. In the Allied Pastoral case, Hunt J said this about, for example, Lord Herschell LC's speech in Browne v Dunn:
"Lord Herschell LC said (at pp 70–71): 'Now my Lords, I cannot help saying that it seems to me to be absolutely essential to the proper conduct of a case, where it is intended to suggest that a witness is not speaking the truth on a particular point, to direct his attention to the fact by some questions put in cross-examination showing that that imputation is intended to be made, and not to take his evidence and pass it by as a matter altogether unchallenged, and then, when it is impossible for him to explain, as perhaps he might have been able to do if such questions had been put to him, the circumstances which it is suggested indicate that the story he tells ought not to be believed, to argue that he is a witness unworthy of credit. My Lords, I have always understood that if you intended to impeach a witness you are bound, whilst he is in the box, to give him an opportunity of making any explanation which is open to him; and, as it seems to me, that is not only a rule of professional practice in the conduct of a case, but is essential to fair play and fair dealing with witnesses.'
His Lordship conceded that there was no obligation to raise such a matter in cross-examination in circumstances where it is 'perfectly clear that (the witness) has had full notice beforehand that there is an intention to impeach the credibility of the story which he is telling'. His speech continued (at p 72): 'All I am saying is that it will not do to impeach the credibility of a witness upon a matter on which he has not had any opportunity of giving an explanation by reason of there having been no suggestion whatever in the course of the case that his story is not accepted.'"
- The principle that a witness's evidence should be challenged in cross-examination if the Court is to be asked to disbelieve him is plainly very important. In cases in which HMRC wish to contend that a company had a tax avoidance motivation in the face of evidence along the lines of that given by Mr Turner, it will always be wise, and must commonly be vital, to raise the issue in terms with the witness. It would, I think, have been better if the parts of Mr Turner's witness statement that I have quoted had been the subject of specific cross-examination.
- In the particular circumstances of this case, however, I do not think that the absence of such a challenge precluded a finding of "unallowable purpose". Mr Peacock accepted that his objection would not avail him if we concluded, as I do, that it followed inevitably from the FTT's findings that securing a tax advantage must have been a main purpose for which TDS held the LGI shares during the relevant period. More than that, it seems to me that the FTT did not need to disbelieve Mr Turner to decide that TDS had an "unallowable purpose" for holding its LGI shares.
- Mr Turner's witness statement brought out the fact that TDS owned its LGI shares long before the Swap and Novations were thought of and that it continued to have ordinary business reasons for doing so. On the other hand, Mr Turner did not dispute that the Swap and Novations had as a main purpose securing a very large tax advantage that depended on TDS holding the LGI shares. While, therefore, there is no question of TDS having had the tax advantage in mind when it acquired the shares, it was evidently intending to use them in the tax avoidance scheme during the currency of the Swap. Had the tax advantage in view been small, there might have been scope for argument as to whether an intention to use the shares to achieve it implied that obtaining the advantage was now a main purpose of holding the shares. In fact, however, the hoped-for gain was large both in absolute terms (more than £70 million) and relative to the apparent value of TDS (some £280 million). That being so, I agree with Mr Ghosh that the inescapable inference was that securing the advantage had become a main purpose of holding the shares. The prospective advantage was of such significance in the context that gaining it must have become a main purpose of holding the shares as well as of the Swap and Novations.
- That conclusion is not, however, inconsistent with Mr Turner having considered, perfectly honestly, that TDS's "purpose" in holding the LGI shares was exclusively commercial. His evidence can be attributed to his taking a different view as to what counts as a "purpose" for holding shares. It reflected his use of language rather than any factual disagreement. Explaining his observation that "the only purpose of TDS in holding the shares in LGI was, is and always has been for bona fide commercial reasons", Mr Turner said that LGI had been a subsidiary for many years, that TDS did not consider disposing of LGI and that TDS did not "consciously formulate any other purpose for holding the shares". As I see it, there is no necessary inconsistency between these points and securing a tax advantage having in fact become, while the Deloitte scheme was being implemented, a "main purpose" of holding the LGI shares within the meaning of paragraph 13 of schedule 9 to FA 1996.
- I would add, however, that I do not accept that, as was submitted by Mr Ghosh, "main", as used in paragraph 13(4) of schedule 9 of FA 1996, means "more than trivial". A "main" purpose will always be a "more than trivial" one, but the converse is not the case. A purpose can be "more than trivial" without being a "main" purpose. "Main" has a connotation of importance.
- I would dismiss the TDS appeal.
The LGI appeal
- As I have mentioned, LGI does not now dispute that it had an "unallowable purpose" for being a party to the loans that were novated to it. As a result, it was barred by paragraph 13(1) of schedule 9 to FA 1996 from bringing into account "so much of the debits … as respects that relationship as, on a just and reasonable apportionment, is attributable to the unallowable purpose". The FTT considered that it was just and reasonable to attribute the totality of the debits to the "unallowable purpose" and so disallowed them in full. The question raised by LGI's appeal is whether that was correct.
- Mr Peacock's thesis was essentially that, for the purposes of paragraph 13(1), debits should be attributed to the "unallowable purpose" only if and to the extent that they would not have been incurred but for the tax planning. Here, he said, there was no such excess. LGI would have incurred debits of the same amount even in the absence of the tax avoidance scheme. If its reserves had not been extracted in the way they were, LGI would (Mr Peacock submitted) have borrowed so that it could pay a dividend.
- In support of his contentions, Mr Peacock referred us to a passage in Mr Turner's witness statement in which he said that one of the commercial objectives of the Group that Deloitte's scheme met was "enabling the reserves in LGI to be extracted as a precursor to making it dormant" and that this objective could have been achieved in another way. "The loan novations," Mr Turner said, "could have been replaced by the payments of dividends by LGI, which would have been less tax efficient". In a similar vein, Mr Turner explained in cross-examination:
"This is exactly the same result as if we had done the reserve strip in a normal way, where it had borrowed the money to pay a dividend; it would have also a borrowing of GBP 250 million with interest on it until we eventually net down the assets and the liabilities".
Asked about how LGI was funded to repay the loans from LGF that Sponsio had passed on to it, Mr Turner went on:
"I believe we put in extra equity as a mechanism for clearing everything out."
- On balance, however, I agree with Mr Ghosh that the materials before the FTT did not justify the attribution of any of the debits claimed by LGI to anything other than the "unallowable purpose". LGI never supplied particulars of what loan(s) it claimed would have been made to it at what rate(s) of interest and for what period(s) had it not adopted the Deloitte scheme. No such details were, for example, given in LGI's Notice of Appeal to the FTT, which simply contended that "the deductions for interest are allowable for corporation tax purposes" and that "the non-trading loan relationship debits should be allowed against trading profits". Again, Mr Turner's witness statement said that the Novations "could have been replaced by the payment of dividends", but did not expand on how or, in particular, what (if anything) LGI would have borrowed for the purpose. Mr Turner went a little further during his cross-examination, but there was still a dearth of specifics. For how long, for instance, might any borrowing on the part of LGI have lasted? Might it have been cleared at once by, say, an injection of equity? Could such an injection have obviated the need for any loan at all?
- In the circumstances, I would dismiss the LGI appeal.
- In my view, the TDS and LGI appeals should both be dismissed.
Lord Justice Bean:
- I agree that for the reasons given by Newey LJ both appeals should be dismissed. I add a brief footnote on the absence of a direct challenge to the sentence in the witness statement of Mr Turner cited by Newey LJ at paragraph 42 above, namely that "whatever the main purpose or purposes of the [Swap] and loan novations, the only purpose of TDS in holding the shares in LGI was, is and always has been for bona fide commercial reasons". It was a prominent theme in the submissions of Mr Peacock QC for TDS that from the moment that Mr Turner left the witness box without that sentence having been challenged, his clients were bound to succeed.
- As the speech of Lord Herschell LC in Browne v Dunn makes clear, if the party cross-examining a witness is going to suggest at the end of the evidence that the witness is lying, that case must be put to the witness to give him the opportunity of refuting it. To take two common examples from other areas of the law: a prosecution witness whom the defendant accuses of having committed the crime himself must have that accusation put to him. A claimant in a personal injury case who is accused of dishonestly exaggerating his symptoms must likewise have that imputation put to him. But Mr Turner's evidence in the passage relied on by Mr Peacock seems to me as far from that type of case as it is possible to be. The critical sentence is essentially a statement of the argument for TDS, or of Mr Turner's opinion on an issue of law, rather than a statement of fact: this is emphasised by the introductory words "whatever the main purpose or purposes of the [Swap] and loan novations", since it is plain that the purpose of the Swap and loan novations was tax avoidance.
- Moreover, it must have been obvious to the FTT from beginning to end of the hearing before them that TDS's case was that it held the shares in LGI for commercial reasons throughout, while HMRC's case was that at least during the currency of the Swap the tax advantage was a main purpose (if not the main purpose) of holding the shares and was accordingly an "unallowable purpose" within the meaning of paragraph 13 of schedule 9 to FA 1996. It is unlikely that a direct challenge by Mr Ghosh QC to Mr Turner would have elicited any new evidence to assist the FTT in its deliberations, or enabled Mr Turner to raise any points he was not already making.
- It would have been preferable, as Newey LJ points out, if the direct challenge had been made. But the failure to make it was not fatal on the facts of the present case. In my view it would be an extremely unfortunate result if the fate of some £70 million were to turn on whether counsel put a question to a witness about one sentence in his witness statement.
Lady Justice Arden:
- I agree with both judgments.