HMRC win in Swiss Centre Ltd ‘loan relationships’ case
No deduction for costs of facilitating the disposal of mortgaged property
Disposal facilitation costs not deductible
The First-tier Tribunal’s (FTT) decision in the Swiss Centre case is worth being aware of, as the relatively brief legal analysis which follows touches on a number of tricky corporate tax issues which come up comparatively frequently in practice: the importance of ‘corporate plumbing’ when considering the deductibility of costs; how closely related to changes in the terms of debt costs need to be in order to be deducted under the loan relationship rules; the taxation of financial guarantees and what it means to be a loan relationship; and when costs which facilitate a disposal can be brought into account for chargeable gains purposes.
The background to this case is the negotiation between the owner of a development property (‘the Swiss Centre’) and a bank over how the proceeds of selling the site should be utilised. Parties related to the taxpayer had outstanding loans with the bank and were unlikely to be able to repay the facilities. An arrangement was reached which, in substance, amounted to the taxpayer using c. £34 million of the proceeds to partially meet the liability of related borrowers. The ultimate question for the Tribunal was whether the taxpayer was entitled to tax relief for this cost.
Agreeing with HMRC, the FTT found that the payment (given the benefit to multiple parties) should have been accounted for as a distribution rather than an expense – preventing any argument for relief which relied on there being an accounting expense from getting off the ground. This distinction between the company incurring the cost and the persons benefitting also impacted the FTT’s analysis of other points – highlighting the importance of the right ‘corporate plumbing’ for obtaining tax relief.
Under the law as it then stood, the taxpayer argued that it should nonetheless be entitled to a deduction for the majority of the cost under the loan relationship rules. It was common ground that the development funding pushed down into the taxpayer company was a ‘loan relationship’ and the release of the bank’s charge over the underlying property was a ‘related transaction’. However, the FTT found no relief was available, essentially on the grounds that there was not a direct causal connection between the cost and the release.
The remaining cost related to a guarantee previously given to the bank by the taxpayer over the liabilities of a related (but not connected) company. The taxpayer argued that in settling its obligations under the guarantee it had effectively acquired the bank’s rights and hence a loan relationship, suffering a loss for which it was entitled to relief. The basic reasoning here followed HMRC’s own guidance (at CFM 31100), but the FTT agreed with Counsel for HMRC (prima facie arguing against HMRC’s publicly stated position) that in this scenario there was in fact no loan relationship debit.
The taxpayer’s final argument was that its costs should be regarded as deductible in calculating its gain on the disposal of the Swiss Centre. The FTT agreed with HMRC that this argument failed the ‘wholly and exclusively’ requirement, essentially because the decision making structure pointed towards the cost being incurred in light of its impact for all the companies concerned. In reaching this view however, the FTT appears to have overlooked authorities which suggest this requirement should be interpreted less narrowly in a chargeable gains context.
The FTT’s detailed comments should be read by anybody concerned with the precise scope of the loan relationship regime and the decision is also likely to add to rather than reduce the uncertainty over the already complicated question of the taxation of financial guarantees.
