A decision has been made on this case concerning a disclosed tax arrangement.
The Upper Tribunal (UT) has found for HMRC in a lead case concerning a disclosed tax arrangement where a deduction was claimed for a debit arising from the partial derecognition of financial assets relating to derivative contracts. Although the facts are quite specific, the implications apply more widely and provide some insight on areas where there have been differing approaches taken by the First-tier Tribunal. The key issues considered, included whether the derecognition debit represents a loss, if there is a loss, whether this ‘arises from’ a derivative contract, does the debit ‘fairly represent’ a loss and, importantly, whether the issue of shares is within the scope of the transfer pricing rules.
The Union Castle Steamship Company Ltd (Union Castle) claimed a deduction under the derivative contracts regime for a £39 million debit in respect of the partial derecognition of derivative contracts which were carried as assets on its balance sheet (the Options). The accounting derecognition was required following a bonus issue of shares by Union Castle to its parent company Caledonia Investments plc (Caledonia) under the terms of which 95 percent of the cash from the Options was to be distributed to Caledonia.
The key points in the UT decision are as follows:
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