Judgment summary
Swiss Centre Ltd (SCL) appealed against the FtT decision released on 22 May 2023 ([2023] UKFTT 449 (TC)), which held that SCL could not deduct approximately £33.5 million (the Disputed Sum) paid to NAMA in calculating its corporation tax liabilities for the accounting period ended 31 March 2012 (1). SCL argued the sum was deductible under the loan relationship rules in Part 5 CTA 2009, or alternatively that part of it (the Additional Sum, approximately £24 million) was deductible under s38(1)(b) TCGA 1992 as expenditure enhancing the value of the Swiss Centre property (1, 2).
The FtT had found that the Disputed Sum comprised two elements: the Additional Sum, said to be paid for release of NAMA's security over the Swiss Centre, and the Lavangna Sum (€11.5 million), paid in relation to a guarantee given by SCL for another company's debts (2). The FtT concluded both sums were paid because it was in the interests of the wider MAR Connection group and its principal shareholders/directors, and should be treated as distributions rather than deductible expenses or losses (2, 4).
SCL appealed on five grounds, alleging errors in the FtT's findings of secondary fact, failure to give adequate reasons for rejecting witness evidence, an erroneous focus on legal form over commercial substance, and errors in concluding that neither the Additional Sum nor the Lavangna Sum gave rise to a loan relationship debit (33).
The Upper Tribunal (Mr Justice Huddleston and Judge Mandalia) dismissed the appeal on all five grounds, holding that the FtT was entitled to reach the factual and evaluative conclusions it did, that there was no error of law, and that the FtT's reasons were adequate (108).
Background
SCL was a company within a group known as the 'MAR Connection', run as a single composite business by Mr McAleer and Mr Laverty, which by 2008 was one of the largest property businesses in Northern Ireland with total assets of just under £1.05 billion and total debt of nearly £667 million (32-33).
Following the global financial crisis, many MAR Connection entities became insolvent relative to their debts. NAMA acquired loans from First Trust and AIB, including facilities relevant to SCL and a related company, Lavangna (76). SCL had granted, jointly with its parent LSI, a guarantee (the Lavangna Guarantee) of €11,500,000 in respect of Lavangna's borrowing, secured by a charge over the Swiss Centre.
On 24 November 2011, the Swiss Centre was sold to Al Faisal Holding Ltd for £197.5 million, and £163 million of the proceeds was paid to NAMA pursuant to a Deed of Agreement (the NAMA Deed) entered into on the same day (11). Of that sum, £33.5 million (the Disputed Sum) was disputed: an 'Additional Sum' of approximately £44-45 million relating to various Indebted Entities' debts to NAMA (net of certain amounts), and the Lavangna Sum of €11.5 million relating to the Lavangna Guarantee (7, 14, 41).
The FtT made extensive findings of primary and secondary fact regarding the negotiations with NAMA, the structure of the MAR Connection, and the reasons for the payments, concluding there was a mixture of purposes behind both payments, related principally to the wider interests of the MAR Connection rather than SCL's own commercial interests (153, 197).
Core dispute
The central issue was whether SCL was entitled to deduct the Disputed Sum of approximately £33.5 million in calculating its corporation tax liabilities for the Relevant Period, either under the loan relationship rules in Part 5 CTA 2009 or, in relation to the Additional Sum, under s38(1)(b) TCGA 1992 as expenditure enhancing the value of the Swiss Centre (1, 2).
SCL contended the Additional Sum was paid to secure release of NAMA's security (the DS1) over the Swiss Centre, and that the Lavangna Sum was paid pursuant to the Lavangna Guarantee to secure development finance, both in the context of the financial crisis (2). HMRC's position was that both sums were paid because it was in the interests of the wider MAR Connection group and its principal shareholders/directors, meaning the sums should be treated as distributions rather than deductible expenses (2).
On appeal, SCL argued the FtT erred in its findings of secondary fact, failed to give adequate reasons for rejecting witness evidence, wrongly focused on legal form rather than substance in construing the NAMA Deed, and wrongly concluded neither sum gave rise to a loan relationship debit (33). HMRC maintained the FtT made no errors and that any errors were not material (34, 35).
Court findings
The Upper Tribunal held that an appellate tribunal should not interfere with findings of primary fact unless the trial judge was plainly wrong, and should not find an error of law simply because it might have reached a different conclusion (53-57).
On Grounds 1 and 2, the Tribunal found the FtT had carefully considered the witness and documentary evidence, was entitled to note a tendency toward retrospective 'narrative' development in the oral evidence of Mr Higgins and Mr McAllister, and was entitled to prefer contemporaneous documentary evidence where it conflicted with oral testimony (60-71). The Tribunal rejected the claim that the FtT downplayed NAMA's threat to withhold the DS1, finding the FtT properly concluded there was a mixture of purposes for the Additional Sum payment and that the deal had substantially been on the table for months before the DS1 issue arose (66-71).
On Ground 3, the Tribunal held the FtT correctly construed the NAMA Deed and the substance of the transactions, finding that value was applied for the benefit of the Indebted Entities by reducing their debts, and that this constituted a discharge of debt across the MAR Connection rather than a cost attributable to SCL's own asset sale (77-78).
On Ground 4, the Tribunal agreed with the FtT that there was no sufficient causal connection between the Additional Sum and the release of the Charge for the purposes of section 307(3) CTA 2009, given the multiple inseparable causes for the payment, and upheld the requirement for a direct causal connection as established in Union Castle Mail Steamship Co Ltd v HMRC and Hexagon Properties Limited v HMRC (88, 92-94).
On Ground 5, the Tribunal agreed that SCL did not establish a loan relationship in respect of the Lavangna Sum, finding on the facts that the sum was not paid by SCL to NAMA in a manner giving rise to a money debt from Lavangna arising from a transaction for the lending of money, and that in any event any such debit would be disallowed under the unallowable purpose rules in sections 441 and 442 CTA 2009 (102-107).
Outcome
The Upper Tribunal dismissed SCL's appeal on all five grounds (108). The Tribunal did not find it necessary to address HMRC's alternative arguments for upholding the FtT Decision (108). Any application for costs was required to be made in writing within one month of release of the decision, pursuant to rule 10(5)(a) and (6) of the Tribunal Procedure (Upper Tribunal) Rules 2008 (109).
Major issues / areas of contention
- Whether SCL was entitled to deduct the Disputed Sum of approximately £33.5 million under the loan relationship rules in Part 5 CTA 2009.
- Whether the Additional Sum was deductible under s38(1)(b) TCGA 1992 as expenditure wholly and exclusively incurred for enhancing the value of the Swiss Centre.
- Whether the FtT erred in its findings of secondary fact concerning the reasons for payment of the Additional Sum, contrary to the evidence.
- Whether the FtT gave adequate reasons for its treatment of the witness evidence of Mr Higgins and Mr McAllister.
- Whether the FtT wrongly focused on legal form rather than commercial substance in construing the NAMA Deed.
- Whether the Additional Sum 'arose from' the loan relationship between SCL and LSI or the related transaction of release of the Charge, for the purposes of section 307(3) and (4) CTA 2009.
- Whether the Lavangna Sum gave rise to a loan relationship debit, including whether SCL was subrogated to NAMA's rights against Lavangna and whether any resulting debt arose from a transaction for the lending of money.
- Whether, if a loan relationship debit otherwise arose, it would be disallowed under the unallowable purpose rules in sections 441 and 442 CTA 2009.