Greene King, red faces: when planning goes wrong

/ 28 June 2012

David Whiscombe

The recent First-tier Tribunal case of Greene King plc highlights some risks of tax planning.

A trading subsidiary owed its parent company several hundred million pounds of genuine commercial debt, interest on which is and was fully tax-deductible. By assigning to another group company the right to receive the interest on the loans (while retaining the right to receive the capital repayment), the group hoped (because of the particular way in which the right was assigned) to procure that, while the interest paid remained deductible for the payer, no-one paid tax on the interest received. The case revolved around the complexities of the corporate Loan Relationship rules.

Sadly, not only did the First-tier Tribunal judge hold that the planning did not work as intended: he concluded that far from no-one being taxable on the interest, two companies in the group were both taxable on what was economically the same receipt. Nor did he have much sympathy with the taxpayer’s protestations of foul play: “We are unimpressed with [the] argument that our conclusions… might lead to double taxation. As we have said, the transactions were a device for ensuring that relief for payment was not matched by taxation of the receipt; and the appellants have no evident difficulty with that outcome. It does not seem to us that they can legitimately complain if the scheme fails in its purpose and instead results in their paying tax twice.”

No doubt the case will go further and may be overturned. But meanwhile it stands as a warning, should one be needed, that playing with fire carries with it some risk of getting burnt.

David Whiscombe


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