Corporation tax Group of companies Loan relationship Novation of liabilities to group company Whether Appellant as result of related transaction Replaced as party to loan relationship Finance Act 1996, Sch 9 para 12
THE SPECIAL COMMISSIONERS
GREENE KING No.1 LIMITED Appellant
- and -
(HM INSPECTOR OF TAXES) Respondents
Special Commissioners: THEODORE WALLACE
MALCOLM J F PALMER
Sitting in London on 13 and 14 January 2005
Kevin Prosser QC and Richard Vallat, instructed by Ernst & Young, chartered accountants, for the Appellant
Philip Jones, instructed by the Solicitor of Inland Revenue, for the Respondents
© CROWN COPYRIGHT 2005
"one or more of the existing Borrowers shall have assumed additional liabilities and obligations under or in respect of the respective loans and of those present, equivalent to the liabilities and obligations of the [Appellant] and [MBEL] to be released by executing a deed supplemental hereto ".
The legislative provisions
"(1) For the purposes of corporation tax all profits and gains arising to a company from its loan relationships shall be chargeable as income in accordance with this Chapter.
(4) This Chapter shall have effect for determining how any deficit on a company's loan relationships is to be brought into account
"(1) Subject to the following provisions of this section, a company has 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;
and references to a loan relationship and to a company's being a party to a loan relationship shall be construed accordingly.
(2) For the purposes of this Chapter a money debt is a debt which falls to be settled
(a) by the payment of money; or
(b) by the transfer of a right to settlement under a debt which is itself a money debt.
(5) For the purposes of this Chapter
(a) references to payments or interest under a loan relationship are references to payments or interest made or payable in pursuance of any of the rights or liabilities under that relationship; and
(b) references to rights or liabilities under a loan relationship are references to any of the rights or liabilities under the agreement or arrangements by virtue of which that relationship subsists;
and those rights or liabilities shall be taken to include the rights or liabilities attached to any security which, being a security issued in relation to the money debt in question, is a security representing that relationship.
"(1) 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, in accordance with an authorised accounting method and 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 arise to the company from its loan relationships and related transactions; and
(b) 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.
(5) In this section '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.
(6) The cases where there shall be taken for the purposes of this section to be a disposal and acquisition of rights or liabilities under a loan relationship shall include those where such rights or liabilities are transferred or extinguished by any sale, gift, exchange, surrender, redemption or release.
(7) This section has effect subject to Schedule 9 "
"(1) this paragraph applies where, as a result of
(a) a related transaction between two members of the same group of companies,
one of those companies ('the transferee company') directly or indirectly replaces the other ('the transferor company') as a party to a loan relationship.
(2) The credits and debits to be brought into account for the purposes of this Chapter in the case of the two companies shall be determined as follows
(a) the transactions, or series of transactions, by virtue of which the replacement takes place shall be disregarded
(6) References in this paragraph to one company replacing another as a party to a loan relationship shall include a references to a company becoming a party to any loan relationship under which its rights are equivalent to those of the other company under a loan relationship of which that other company has previously ceased to be a party.
(7) For the purposes of sub-paragraph (6) above a person's rights under a loan relationship are equivalent to rights under another such relationship if they entitle the holder of an asset representing the relationship
(a) to the same rights against the same persons as to capital, interest and dividends; and
(b) to the same remedies for the enforcement of those rights,
notwithstanding any difference in the total amounts of the assets, in the form in which they are held or in the manner in which they can be transferred.
By paragraph 12(8) and paragraph 11(4) "related transaction" has the same meaning in paragraph 12 as in section 84.
Submissions for the Revenue
"A novation discharges the legal obligation of the original obligee and replaces it by a new obligation of a new obligee. It does not merely substitute a new debtor for the old in respect of the same debt or liability "
MALCOLM J F PALMER
Release Date: 3 March 2005