The UK First Tier Tribunal finds for HMRC on a Transfer Pricing point

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Abbey National Treasury Services Plc (ANTS) v HM Revenue & Customs (HMRC)

[2015] UKFTT 341 (14 July 2015)

This was an avoidance scheme, known as the Umbriel scheme, and involved UK-UK transfer pricing.

The issues in dispute between the parties were whether the £160 million debit claimed in ANTS’ tax return for the year ended December 2008 was deductible as a debit arising from ANTS’ derivative contracts under Schedule 26 of the Finance Act 2002 and whether the transfer pricing rules at Schedule 28AA of the Income and Corporation Taxes Act 1988 (now Part 4 Taxation (International and Other Provisions) Act 2010) applied to the Tracker Shares and if so, the extent to which they reduced the debit claimed by ANTS.

The FTT found for HMRC and ANTS’ appeal was dismissed.

The transfer pricing point has a potentially wide impact as it would appear to permit transfer pricing rules to be applied to ‘shareholder-type’ transactions which have traditionally been treated as falling outside their scope.

The appeal was intended to concentrate on points of principle. The actual numbers, the size of the debit claimed, were not critical.

ANTS needed to demonstrate that the £160 million debit fairly represented a loss which had arisen from its derivative contracts in accordance with part 1, Schedule 26 Finance Act 2002 in order to succeed in its appeal and that there was nothing in the UK transfer pricing rules at Schedule 28AA Taxes Act 1988 which could reduce that debit.

The FTT held that the debit did not reflect a fair representation of loss from the transaction, it did not arise from the derivative contract and therefore no debit could properly be recognised under the derivative legislation.

The FTT also held that the Tracker Shares were a provision for Schedule 28AA purposes and that the comparator transaction was that they would not have been issued at all between independent enterprises with the result that any debit arising should be reduced to nil. This aspect of the decision supports the position that re-characterisation may sometimes be appropriate.

ANTS had issued tracker shares to its parent company, for a consideration of £1,000.

These shares had specific rights that required ANTS to pay dividends equal to cash flows receivable from specified derivative assets (swaps).

When the shares were issued, ANTS derecognised £160m from the accounting value of the relevant swaps and recognised a corresponding £160m debit for dividends. This debit was claimed as a tax deductible loss.

The Tribunal rejected the scheme on the basis that the debit did not ‘fairly represent’ a loss of ANTS for the purposes of the derivative legislation and that, in any event, it did not represent an amount ‘arising from’ ANTS’s derivative contracts.

The Tribunal also upheld HMRC’s contention that the debit, if otherwise deductible, fell to be eliminated under transfer pricing rules as applied by the derivative contracts code.

ANTS has been given leave to appeal.

The full FTT decision can be found here


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