As a consequence of the early redemption, the company also fully recognised the unamortised portion of a discount on the original issue of the loan notes and of the initial transaction costs incurred when the structure was established. In aggregate, the redemption premium and recognition of previously unamortised discount and issue costs led to a debit of c. £150 million. The taxpayer argued this debit was deductible.
In the First-tier Tribunal (FTT), HMRC successfully argued that (with the exception of the ‘penalty’ element of the early redemption premium) these costs all fell to be disallowed under s.327 Corporation Tax Act 2009 (CTA 2009) as they were ‘referable’ to the pre-migration period.
The taxpayer appealed the decision to the Upper Tribunal (UT) on three grounds.
One of the grounds was that the reference to losses in s.327 CTA 2009 did not include ‘expenses’ (s.327 CTA 2009 refers to ‘losses’ rather than ’expenses’) and argued that the whole loss in this case was made up entirely of expenses. The UT (like the FTT), whilst accepting a conceptual distinction between ‘losses’ and ‘expenses’ in some tax contexts, disagreed that the scope of s.327 CTA 2009 was restricted in this way.
The other grounds were that expenses were referable to the remaining contractual term and therefore post migration period, and that the FTT erred in law in concluding otherwise.
The UT agreed that the FTT identified the right test for deciding which period debits were referable to, which required an assessment of when losses arose as a matter of commercial reality and had regard to (but could not be equated to) questions of causation. The UT has ruled, however, that the FTT did err in concluding that the unamortised issue costs and the unamortised discount were referable to the pre-migration period. This is on the basis that it is ‘economically sensible’ to spread the issue cost over the life of the loan - the commercial reality was that the issue costs and the discount were an integral part of obtaining the funding and could properly be recognised over the expected term of the loan note (in spite of the expenses themselves being incurred at date of issue). However, the UT accepted that the FTT was entitled to find the compensatory element was referable to the pre-migration period and therefore dismissed that aspect of the appeal.
