Judgment summary
This appeal concerned the corporation tax treatment of loan relationships entered into by Barclays Bank PLC (BBPLC) in 2008 during the financial crisis (1). BBPLC issued reserve capital instruments (RCIs) with a face value of £3bn on 27 November 2008, while its parent company Barclays PLC had issued warrants on 31 October 2008 to the same subscribers (2).
BBPLC accounted for the £3bn received as £2.2bn attributable to the RCIs and £800m attributable to the warrants, treated as a capital contribution from Barclays to BBPLC, with the £800m discount written off over the expected life of the RCIs as a debit for corporation tax purposes (3).
The FTT found this accounting treatment was not GAAP-compliant, holding that the full £3bn was paid for the RCIs alone, so there was no discount and no debit to recognise (4). BBPLC appealed on two grounds, both challenging the FTT's 'Economic Reality Finding' that the £3bn was paid for the RCIs with the value of the warrants given away by Barclays shareholders (83).
The Upper Tribunal dismissed Ground 1 (perversity) but allowed Ground 2, finding that the FTT had erred in law by taking into account certain irrelevant factors, including press comment used other than as a cross-check, an emphasis on shareholders (rather than Barclays) giving away value, reliance on observations in PCP Capital Partners LLP v Barclays Bank PLC, and a mistaken view that the warrants could only be a sweetener if given away (177-178). The Tribunal set aside the FTT's decision and remitted the matter for reconsideration (178, 185).
Background
At the height of the 2008 financial crisis, the Financial Services Authority instructed major UK banks to increase Tier 1 capital ratios. Barclays sought to raise additional capital from Qatar Holding LLC and Sheikh Mansour of Abu Dhabi (through PCP Gulf Invest 2 and 3 Limited), described together as the Subscribers, rather than accept government funding (18, 22).
On 31 October 2008, RCI Subscription Agreements and Warrant Subscription Agreements were entered into. The Subscribers each agreed to subscribe for £1.5bn of RCIs carrying 14% interest, and separately agreed with Barclays to acquire warrants over Barclays ordinary shares for a nominal consideration of £0.76 each (20-21). Shareholder approvals were obtained on 24 November 2008 and the RCIs were issued on 27 November 2008, with BBPLC receiving £1.25bn from each of Qatar and PCP and £500m from institutional investors (26).
BBPLC was beneficially entitled to the full proceeds of the RCIs; no part was paid to or held for Barclays (27). The capital raising also involved mandatorily convertible notes not in issue in this appeal (23). All warrants were exercised by February 2013 and the RCIs were redeemed in full for £3bn on 15 June 2019 (28).
For accounting purposes, the £3bn was apportioned between the RCIs (£2.2bn) and the warrants (£800m) based on estimated fair values at a commitment date of 31 October 2008, described as a 'warrants first approach' (29). BBPLC brought an accrued discount of £7,253,036 into account as a loss for its first relevant accounting period ending 31 December 2008 (31).
Core dispute
The central issue was whether the FTT was entitled to find, as a matter of substance and economic reality, that the £3bn paid by the Subscribers was paid for the RCIs alone, with the value of the warrants (around £800m) effectively given away by Barclays shareholders, such that BBPLC's accounting treatment (which allocated £800m to the warrants as a capital contribution and recognised a discount on the RCIs) was not GAAP-compliant (1-6, 71).
BBPLC's Ground 1 contended that the FTT's 'Economic Reality Finding' was perverse or irrational, defying commercial common sense, because the particular factors relied upon at [138]-[139] could not justify the conclusion (83). Ground 2 contended, in the alternative, that the FTT erred by taking into account irrelevant or wrong factors and by failing to take into account relevant factors, such that either the only reasonable finding was that the £3bn was paid for both the RCIs and the warrants, or the FTT might well have reached a different conclusion (83).
HMRC maintained that the FTT was entitled to reach its conclusion, having weighed the evidence including the terms of the RCI and Warrant Subscription Agreements, the beneficial entitlement of BBPLC to the full £3bn, and the absence of evidence that Barclays' board had decided to make a capital contribution to BBPLC (89, 102-103).
Court findings
The Upper Tribunal held that the challenges fell within the Edwards v Bairstow principle, requiring BBPLC to show either that no properly instructed tribunal could have reached the FTT's conclusion (Ground 1), or that the FTT took into account irrelevant considerations or omitted relevant ones which might have affected the outcome (Ground 2) (84-86).
On Ground 1, the Tribunal rejected BBPLC's submission that the only conclusion available was that the £3bn was paid for both the RCIs and the warrants, finding that the FTT was entitled to consider the broader context, including the terms of the RSAs and WSAs, the fact BBPLC was beneficially entitled to the full £3bn, and the absence of evidence of a firm intention by Barclays to make a capital contribution (104-110, 175-176).
On Ground 2, the Tribunal found the FTT erred in law in four respects: it wrongly used press comment describing shareholders as taking a 'thwack' as evidence supporting its conclusion rather than merely as a cross-check (122-123); it wrongly treated as fundamental the distinction between Barclays and its shareholders giving away value (130); it wrongly relied on observations of Waksman J in PCP Capital Partners LLP v Barclays Bank PLC that the warrants had been 'given away', which were not relevant to the substance and economic reality analysis (133-135); and it wrongly considered that the warrants could only function as a 'sweetener' if given away for nothing, when they could still be motivational as part of the deal without being given away (160-162).
The Tribunal found the FTT did take into account the conditionality of the warrants' exercise on full payment of the RCIs, contrary to one of BBPLC's submissions (99-101). It also found that the FTT was entitled to give weight to the institutional investors' subscription for £500m of RCIs at par without warrants, and was entitled to give little or no weight to PWC's approval of the accounts absent evidence from PWC (116, 168-169). The Tribunal did not consider it necessary for the FTT to distinguish Marks & Spencer plc v HMRC [2019] UKUT 182, since the substance and economic reality of a transaction is a fact-sensitive evaluative exercise (173).
Outcome
The Upper Tribunal dismissed Ground 1 but allowed the appeal on Ground 2, finding that the identified errors of law might have led the FTT to a different conclusion on the substance and economic reality of the transactions (177-178).
The Tribunal set aside the FTT's Decision and remitted the appeal to the FTT to reconsider its decision on Issue (1) (whether the accounts complied with GAAP) in accordance with the Upper Tribunal's findings, and to determine Issues (2) to (5), which the FTT had not previously needed to address, and to clarify its findings on Issue (4) (185, 180).
Major issues / areas of contention
- Whether the FTT's finding that the £3bn was paid for the RCIs alone, with the warrants given away by Barclays shareholders, was perverse or irrational (Ground 1)
- Whether the FTT took into account irrelevant factors or failed to take into account relevant factors in reaching its 'Economic Reality Finding' (Ground 2)
- Whether press comment describing shareholders as taking a 'thwack' was properly used as evidence rather than merely as a cross-check
- Whether it mattered, for economic substance purposes, whether Barclays itself or its shareholders gave away the value of the warrants
- Whether reliance on Waksman J's observations in PCP Capital Partners LLP v Barclays Bank PLC that the warrants had been 'given away' was relevant
- Whether the warrants could only be regarded as a 'sweetener' if they were given away for no consideration
- Whether the conditionality of the warrants' exercise on full payment of the RCIs was properly taken into account
- Whether the FTT was entitled to place little weight on PWC's approval of BBPLC's accounts
- Whether the analogies to a car showroom servicing deal and to Marks & Spencer plc v HMRC were apt comparisons
- What remedy should follow: remittal to the FTT or re-making of the decision by the Upper Tribunal