Bristol & West plc

This case involved an attempt by the Bank of Ireland group to utilise a potential loophole in the derivatives transitional provisions in the Finance Act 2002 which changed the tax rules for the swap in question from an accruals to a mark-to-market basis. The new regime also allowed for intra-group transfers of swaps to be made on a no gain/no loss basis. The new regime applied from a company's first accounting period starting on or after October 2002. In April 2003, Bristol & West plc (B&W) was subject to the new regime, whereas its sister company, Bank of Ireland Business Finance Ltd (BIBF) (whose year end was 31 August) was still taxed under the old rules. B&W novated an "in the money" fixed/floating interest rate swap to BIBF in return for a premium of £91m and relied on the roll-over provisions enacted in paragraph 28, schedule 26 to Finance Act 2002 to argue that no tax arose on the novation. BIBF would be treated as acquiring the swap for £91m, and then would only be taxed on future changes in value of the swap; the £91m paid to B&W would effectively fall out of charge.

HMRC argued that paragraph 28 could not be intended to cover intra-group transactions where only one party was subject to the new regime, despite the fact that there was no specific statutory provision limiting roll-over to transactions between companies taxed "under this Schedule". Instead, the requirement was simply that both companies had to be within the charge to corporation tax. The First Tier Tribunal (FTT) held:

"It is plain to us, … as a simple matter of common sense, that Parliament cannot have intended paragraph 28 to apply so as to let one company drop out of charge without the other inheriting the liability".

Accordingly, the roll-over did not apply and B&W was taxed on the accrued amount on transfer. It is interesting to note that, under the proposed GAAR, one of the factors to be taken into account when determining the "double reasonableness" test is whether a scheme is designed to exploit any shortcomings in the legislation. When the courts are willing to go this far to use purposive construction to fill in the gaps already, it may seem that the GAAR is largely unnecessary in such circumstances!

Please click on the links below for the other articles in the June 2013 tax newsletter.

• Partnership taxation - HMRC consultation on avoidance involving partnerships
• Fidex Ltd -v- HMRC
• STICS - discounts go to Hades
• General anti-abuse rule (GAAR)
• WHA Limited -v- HMRC
• Colaingrove: composite supplies for VAT purposes
• Middle Temple -v- HMRC
• The Royal College of Paediatricians -v- HMRC
• PPG Holdings BV- AG's opinion on VAT on management advice to pension fund
• Special Italian tax regime applicable to medium-long term loans: abuse of law?
• HMRC brief on SDLT overpayment relief for TOGCs following Robinson case