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Tribunal rejects Greene King tax appeal

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28th Apr 2014
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Upper tribunal judge Mr Justice Mann has thrown out for the second time an appeal [UKUT 178] from brewery and pub group Greene King over an EY-devised tax scheme.

The brewer has been trying to overturn the Revenue's rejection of the complex scheme for more than a decade, which relates to the correct treatment of a £300m internal loan.

Greene King's auditors EY had devised and marketed the tax planning scheme under the name Project Sussex. However, the scheme not only failed to enable Greene King to avoid tax on £21.3m of interest made to one of its subsidiaries, but also left it unintentionally taxed twice on some gains.

The judge said: “If it makes it look as if there is somehow a charge to two lots of tax on the same amount then the Revenue says it is a consequence of the artificial transaction in which the Greene King group indulged.”

The UT also agreed with the Revenue that there was a “realised profit” on repayment of the loan and that there was “no loan relationship at all” between Greene King and its subsidiaries.

Lawyers representing Greene King argued that the first tier tribunal's 2012 decision not to allow the scheme had been wrong in part because it unfairly resulted in double taxation.

Greene King said in a statement: “Greene King has been paying its taxes for 214 years and we are a major contributor to the Treasury with a third of our turnover, or £375m, paid to HMRC in various forms of tax, in the last year alone. This is seven times what we pay to our shareholders in dividends.

“Over and above this, we occasionally take specific tax advice from experts, such as Ernst & Young in this case, about other areas of potential tax paid by Greene King. In this case, the upper tribunal court has disagreed with the advice we received and we are therefore currently considering whether to appeal against this decision. The upper tribunal judge expressly said this was a question of correct accounting treatment of a loan, not tax avoidance.”

Prem Sikka, of the University of Essex, said: “This case once again shows the determination of the tax avoidance industry to destroy the public finances. It's time that there was a public investigation into the industry.”

The judge also indicated that there were “nine or 10” other similar schemes which may also be facing tax demands following the ruling.

Case background

In 2003 EY devised Project Sussex which involved the group company lending £300m to subsidiary Greene King Brewing and Retailing (GKBR) on which interest accrued.

It assigned the right to receive the remainder of the interest to another subsidiary Greene King Acquisitions (GKA) but retained the principal. Around £21.3m of interest remained with a net present value of £20.5m.

GKA then issued £1.5m of preference shares to the group company which carried a special dividend of £975,000 to be followed by an annual dividend.

The brewer continued to recognise the whole of the £300m debt in its accounts, while GKA recorded the right to receive interest as a receivable at its NPV of £20.5m, credited the nominal value of the preference shares as a non-equity capital instrument, and credited the difference between the £1.5 and the NPV to its share premium account.

Greene King argued that it was not liable to tax on the £21.3m interest arising from the loan, although it did have to pay tax on the £970,000.

It said GKA should pay tax on £768,000, representing the difference between NPV of the income stream on assignment and the amount actually received.

The UT agreed with an earlier decision by the FTT and said Greene King should de-recognise part of the value of the loans in its accounts to reflect the fact that it had become a sum in the future without a right to interest, as required under FRS 5.

Replies (2)

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Stepurhan
By stepurhan
28th Apr 2014 15:28

"Various forms of tax"

Once again this weaselly phrase comes out.

On the basis that their turnover is all subject to VAT, then 20% of their turnover is VAT which was never theirs in the first place. I should also imagine they have a substantial wages bill, so they will be paying over tax and employee's NIC which is on behalf of their employees. It is only when you get on to employer's NIC that you are actually talking about additional sums paid to HMRC.

As for the amount paid compared to what they pay shareholders, that is just a meaningless comparison. They choose what amount to pay out as dividends, and presumably are in a position to pay out much more if they wanted to.

I also hope that I am not the only one disturbed by the company auditors being the ones who devised and marketed the tax planning scheme. Even with chinese walls between departments, would the audit side really refuse to sign off on a scheme devised by their co-workers?

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By The Limey
28th Apr 2014 15:45

Stephuran - it was even worse than that in this case. The tax treatment depended on the accounting treatment. I understand that there was (is?) an FRC investigation into EY on this.

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