Court rules against Ladbrokes over £54m corporation tax avoidance scheme

High street bookies Ladbrokes has lost a First Tier Tribunal (FTT) appeal against HMRC, which has successfully argued that the company’s attempt to avoid £54m of corporation tax through the use of a scheme in 2008, promoted by Deloitte, was barred by law

The appeal related to Ladbroke’s use of the tax avoidance scheme, which had been notified under the disclosure of tax avoidance schemes (DOTAS) rules in FA 2004 Part 7.

The FTT ruling means Ladbrokes cannot reclaim £54m in tax. HMRC said there were originally 11 users of this type of scheme. Seven conceded before the tribunal hearing and paid the tax they owed, but there are another three similar cases worth £112m of tax.

The scheme exploited a perceived loophole in the taxation of loan relationships, which was closed in the same year while the relevant legislation was strengthened in 2009.

Under the scheme, two companies in the Ladbroke group (Ladbroke International and Travel Document Service) entered into specially-designed arrangements, so an artificially manufactured fall in the value of the shares in one company created a loss in the other company for tax purposes. The group suffered no real economic loss overall.

The scheme involved bringing a holding of a subsidiary’s shares within the loan relationship rules by entering into a form of derivative contract known as a ‘total return swap’ in relation to them. It then depresses the value of the shares by novating a large loan liability into the subsidiary from another group company.

The intended effect of these arrangements was to accrue a large loan relationship debit in the shareholding company by reference to the reduction in the fair value of the shares in its subsidiary. In consequence of the novation, the subsidiary company also accrued conventional loan relationship debits as a result of its liability to interest on the loans novated to it.

Ladbrokes admitted that the arrangements were intended to avoid tax but argued that anti-avoidance rules did not catch them.

The tribunal agreed with HMRC that the rules prevented Ladbrokes from gaining the tax advantage they sought, saying that the loan relationship and the debits related to an ‘unallowable purpose’. [Travel Document Service Ladbroke Group International and the Commissioners for Her Majesty’s Revenue and Customs, [2015] UKFTT 0582 (TC), TC04728].

Jim Harra, HMRC’s director general of business tax, said: ‘Avoidance just doesn’t pay – we win around 80% of cases taxpayers choose to litigate and many more concede before litigation. We will uncover the avoidance schemes and contrived structures designed to minimise tax and we will challenge them.’

A Ladbrokes spokesperson said: ‘We believed we had a strong argument in this case. We're now considering our options with regards to a possible appeal.’

Ladbrokes has 56 days to appeal the verdict.

The FTT ruling is here

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