A tax avoidance scheme used by Stagecoach Group to cut their tax bill by £11m has been stopped in its tracks according to a First Tier Tribunal (FTT) relating to a tax case heard last July, reports Sara White
The bus and train firm went to the First Tier Tribunal (FTT) over HMRC claims that it tried to avoid tax by using transactions within the Stagecoach group to artificially create a loss.
At stake in the case, Stagecoach Group Plc & Stagecoach Holdings Limited v The Commissioners For HM Revenue & Customs UKFTT 0120 (TC) was a dispute about the recapitalisation of two companies, Stagecoach Holdings Ltd and Stagecoach Services by the ultimate parent company Stagecoach Group plc. This centred around whether internal loans amounting to nearly £40m should be treated as a deduction when computing the ultimate parent company’s (Group’s) profits for corporation tax purposes.
In this instance, Stagecoach’s tax adviser was KPMG. The case relates to corporation tax self assessments for the period ending 30 April 2011 and 27 April 2012. HMRC opened enquiries into the returns on 31 July 2012 and a subsequent closure notice was issued by HMRC claiming that there should be no deduction from taxable profits, effectively for the £39.4m claim.
The complex artificial scheme involved moving money between companies in the Stagecoach group in an attempt to create a large loss in one company. However, there was no equivalent gain in the other companies.
The scheme was intended to artificially reduce Stagecoach’s corporation tax bill in the accounting period ending 30 April 2011.
The FTT ruled the scheme did not work, agreeing with all of HMRC’s legal challenges.
The Stagecoach confirmed that the historic tax involved here was already paid.
A Stagecoach Group spokesman said: ‘We believe it is right that we pay our fair share of taxes and we are committed to doing so. The case involved the interpretation of historical and technical issues which are no longer relevant under current legislation, and no additional tax is payable by Stagecoach as a result of the ruling.
‘These historic transactions involved Stagecoach investment in its subsidiaries, and the First Tier Tribunal ruling did not challenge the commercial background behind those transactions.
‘The Tribunal did not however agree with the tax treatment Stagecoach had adopted and we will take time to consider the findings of the Tribunal before deciding on the way forward. Regardless of the outcome, the case does not impact our expectation of profit or our effective tax rate.’
In addition, the FTSE listed company paid over £30m in UK corporation tax in the last financial period, and expects to pay over £35m in corporation taxes in 2015-16.
CCH tax writer Sarah Arnold commented: ‘In this case a group of companies entered into a tax avoidance scheme designed to create a tax deduction in the parent company (Group) without a corresponding taxable receipt in any other company.
‘The transactions involved a subscription by Group for shares in a subsidiary (Holdings) using a forward subscription agreement which was linked to an existing group loan. Tying the subscription in with the loan was said to bring what was effectively the debit for the subscription price paid for the shares within the loan relationships provisions, creating a tax deductible loan relationships debit.
‘The FTT has ruled, however, that the debit was not a loan relationships debit at all and consequently the scheme failed. It has also expressed a view on all of the issues raised in respect of the tax arbitrage notice issued by HMRC on Holdings albeit that these views were all obiter.
‘The conjoined appeal by Holdings was allowed as the consequence of the finding that there was no tax deductible debit for Group was that the tax arbitrage notice was no longer required and fell away.’
The tribunal ruled there was no loss for Stagecoach for tax purposes and therefore the scheme did not work so there could be no reduction in their corporation tax bill.
This case has a potential knock-on effect on a number of outstanding appeals, with HMRC claiming that there are 11 other similar cases which will be affected by this decision and the total tax at stake is estimated to amount to £179m.
Stagecoach was represented by Nicola Shaw QC and Michael Firth, barrister, instructed by KPMG LLP (UK), for the appellants.
The FTT ruling in Stagecoach is available here