The scheme, which was set up in 2008,  involved two companies in the Ladbrokes group (Ladbrokes International and Travel Document Service) entering into purposely-designed arrangements so that an artificially manufactured fall in the value of the shares in one of the companies generated a loss for the other company for tax purposes. The group suffered no real loss overall.

At both the First Tier Tribunal (FTT) and the Upper Tribunal Ladbrokes conceded that the arrangements were intended to avoid tax but argued in court that anti-avoidance rules did not catch them out. [Travel Document Service, Ladbroke Group International, and the Commissioners for Her Majesty’s Revenue and Customs, [2017] UKUT 45 (TCC), Appeal numbers: UT/2016/0012 & 0013].

The complicated tax avoidance scheme was designed to bring a shareholding in a subsidiary company within the scope of the Shares with Guaranteed Returns etc anti-avoidance rules in FA 1996, s. 91B.

These rules, designed to deal with a number of avoidance schemes which exploited the legal form of shares while seeking to replicate a return economically equivalent to interest, operated by deeming the shareholding to represent rights under a creditor loan relationship. The rules were re-enacted in CTA 2009, Pt. 6, Ch. 7 until their repeal with effect from 22 April 2009.

Under the scheme Travel Document Services Ltd brought its holding of a subsidiary company's shares within the loan relationship rules by entering into a derivative contract in the form of a total return swap and subsequently depressed the value of the shares by novating a loan liability into the subsidiary from another group company.

The effect was to accrue a loan relationship debit for Travel Document Services by reference to the reduction in the fair value of the subsidiary's shares. The subsidiary (Ladbroke Group International Ltd) accrued conventional loan relationship debits as a result of its liability to interest on the loans novated to it. It was accepted that the provisions of FA 1996, s. 91B applied to deem the shareholding in the subsidiary as a creditor loan relationship.

The appeal essentially involved a consideration of whether the loan relationship unallowable purpose rules in FA 1996, Sch. 9, para. 13 could apply to a deemed loan relationship in the same way as they applied to an actual loan relationship.

The case had already been heard at an FTT, which found in favour of HMRC. At the Upper Tribunal, Travel Document Services argued that it would make no sense to attribute its motives for holding the underlying shareholding in the subsidiary as being its motive for holding a deemed loan relationship because it could not have a motive for holding something it did not in fact own.

The FTT held that on any rational analysis, the company’s purposes in causing the satisfaction of the provisions of FA 1996, s. 91B must be treated as being its purposes for being party to the deemed loan relationship. These provisions were satisfied by the entering into of the swap; therefore, the motive for entering into the swap was the appropriate test under the legislation. And because Travel Document Services had already accepted one of the main motives for entering into the swap was to facilitate the tax advantage, it followed that it had an ‘unallowable purpose’ throughout the period in which it was deemed to hold the loan relationship by virtue of FA 1996, s. 91B.

The Upper Tribunal upheld the FTT judgment, finding that there is no conceptual or practical difficulty in identifying the subjective purposes of a party to a deemed loan relationship, and that Travel Document Services’ purposes in owning the shares during the period included making them fall within the shares with guaranteed returns etc. legislation and then depreciating them so as to secure a tax advantage.

The FTT also held that the loan relationship debits arising to Ladbrokes also had an unallowable purpose. These debits related to an actual loan relationship not a deemed loan relationship therefore it was not necessary to consider the deemed loan relationship point. The Upper Tribunal upheld this judgment.

With regard to the amount of each debit which should be attributed to the unallowable purpose, the FTT judged, in the case of both taxpayers, that the whole of the debits arising should be attributable to the unallowable purpose, notwithstanding that this gave rise to an asymmetric tax disadvantage to the group as a whole. In this regard, the legislation simply did not require symmetry of treatment. The Upper Tribunal also upheld this judgment.

Wolters Kluwer tax expert, Paul Davies said: ‘This judgment represents another taxpayer defeat in a line of tax avoidance schemes designed to exploit aspects of the loan relationship rules. The specific rules in point were the shares with guaranteed returns anti-avoidance provisions of FA 1996, s. 91B; however the real focus of the judgment was on the loan relationship unallowable purpose rules and, in particular, the principle that deemed loan relationships should be treated in the same way as actual loan relationships for the purposes of these rules.

‘The shares with guaranteed returns rules were repealed with effect from 22 April 2009. However the unallowable purpose rules remain effective therefore this judgment has continuing relevance for the interpretation of those rules.’

Jennie Granger, HMRC’s director general for customer compliance, said: ‘Ladbrokes would have been better off just paying the tax but instead they pursued this lengthy legal dispute with HMRC. Avoidance schemes like this just don’t work and HMRC will always take firm action against them. The bookie gambled and lost when the odds of success could not have been lower.’

HMRC reported there were originally 11 users of this type of scheme. Nine have now conceded before the tribunal hearing and paid the tax owed.

A Ladbrokes spokesman said: 'Ladbrokes will not be commenting on this story at this stage.'

Travel Document Service, Ladbroke Group International, and the Commissioners for Her Majesty’s Revenue and Customs, [2017] UKUT 45 (TCC) is here.