Bank of Ireland subsidiary loses £30m tribunal case
The Bank of Ireland lost a first-tier tribunal appeal that will force it to pay £30m corporation tax on a £91m gain.
Bristol and West, the bank’s subsidiary, tried to take advantage of the novation rules in the Finance Act 2002 for transferring the money swap contract to Bank of Ireland Business Finance (BIBF), another of the bank’s subsidiaries, in return for a premium of £91m.
In Bristol and West v HMRC  UKFTT 216 (TC), the tribunal heard how the bank expected the tax due to disappear due to the cancellation of the original swap contract and the replacement of a new one.
This was because Bristol and West calculated its profits on an accruals basis, as allowed under the Finance Act 2002, while BIBF used the mark-to-market method.
When HMRC refused to accept the treatment and opened an enqiry, Bristol and West turned to the tribunal in support of its 2004 tax return claim that the £91m was tax exempt.
To add extra spice to the case, the bank was represented at tribunal by Graham Aaronson, who chaired the panel that devised the UK's new general anti-abuse rule that will be enacted in the Finance Act 2013.
Specialist accounting evidence was given at the tribunal by KPMG partner Colin Martin and HMRC’s Robert Harvey.
The accountants agreed that the bank’s treatment of the transaction in its accounts for the year 31 March 2004 had been wrong. Originally the entire £91m profit was treated as a balance sheet item, with a portion attributed to the previous financial year.
The correct accounting treatment was first to credit to the P&L account with the profit that arose on the date of the novation, 29 August 2003, but this was a sideline to the main case. Once the judges decided that tax was due on the full swap value, the accounting treatments would only affect how much of the £31m tax due should be levied in 2003, and how much in 2004.
The tribunal focused some attention on Bristol and West's claims that closure notices on its 2003 and 2004 tax returns had been issued in late 2007. The HMRC officer later informed the bank by email that the notices had been issued by mistake. In spite of this mishap, the judges ultimately ruled in the tax department's favour.
The main point on which the case turned was that two companies treated as one are required to calculate the notional “same company profits” in respect of the swap, as though there had been no novation.
The drafting of the relevant schedule in the 2002 rules was hotly debated, but the judge concluded, “Parliament cannot have intended... to let one company drop out of charge without the other inheriting the liability.”
Exchequer secretary David Gauke commented on the case: “The vast majority of businesses and individuals pay the tax they owe. HMRC will challenge avoidance schemes that risk denying the Exchequer vital tax revenues and will pursue to litigation when necessary.”
The Bank of Ireland, which can still appeal the decision, declined to comment on the case.
Alison Loveday, managing partner of Berg, a firm which specialises in interest rate swap mis-selling said that the case is an “interesting” one.
“It goes to show that swaps are a product that should only be used by sophisticated financial institutions and not small businesses,” she said.
“The fact that so much money was made on one shows that they do have a purpose, but obviously they shouldn’t be used for tax avoidance purposes.”