A tax avoidance scheme used by the Ladbroke Group (LG) has been found to be ineffective for the third time.  Both the First-tier Tribunal and the Upper tribunal had previously held the scheme to be ineffective and the Court of Appeal (CoA) has concurred with the lower tribunal decisions.

The scheme involved using the loan relationship rules that govern the taxation of loans and similar instruments but also deems certain transactions with shares as taxable under the loan relationship rules in certain circumstances.  Unallowable purpose rules within the loan relationship rules state that deductions cannot be made if one of the main reasons for entering into a transaction or series of transactions is to gain a tax advantage.

The LG had used internal loans and a total return swap over a subsidiary’s shares to generate losses that would be deemed to be loan relationship losses (or debits to the use the statutory language).  The CoA had held that the main reason for entering into the series transactions was to secure a tax advantage and this advantage, some £70m, represented a significant part of the whole value of the subsidiary (around £280m).  While LG had held the shares in the subsidiary for many years before the scheme and has continued to hold the subsidiary’s shares since the end of the scheme this didn’t negate that one of the reasons for holding the shares during the scheme was a tax advantage.

The CoA dismissed LG’s appeal agreeing that the scheme was ineffective.

The decision can be found at: Travel Document Service & Ladbroke Group International v Revenue & Customs (Rev 1) – Find case law (nationalarchives.gov.uk)

The loan relationship rules with the corporation tax legislation are complex and some schemes to take advantage of these complex rules have been proven to be ineffective as this case highlights.  Please do contact us if you have any questions around loan relationship rules or corporation tax in general.  These are subject matters we are very experienced with.