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By Ben Stupples
Aug. 2 — A U.K. Court of Appeal decision to dismiss a six-year tax avoidance dispute involving EY LLP marks a significant victory for Her Majesty's Revenue and Customs over tax arrangements designed by the country's top four accounting firms, according to tax practitioners.
The case focused on an intra-company loan scheme devised and marketed in 2003 by EY to obtain tax relief on interest paid to company subsidiaries. Several corporate groups used these schemes at the time, including Greene King Plc, the U.K.’s largest pub retailer and brewer by market capitalization, according to data compiled by Bloomberg BNA.
The Court of Appeal's July 27 decision marked the third time over the past six years that Greene King disputed HMRC's findings, which questioned a 300 million pound loan ($400 million) made between the company and its subsidiaries.
The tax amount upheld by the Court of Appeal's ruling was 8.7 million pounds. HMRC said in a statement it expects to collect a further 22 million pounds from similar matters involving businesses that used the same tax avoidance scheme.
Heather Self, a chartered accountant and partner at London-based law firm Pinsent Masons LLP, questioned whether the court sided with the correct accounting treatment, but described it as a major case in which HMRC has rejected a strategy drawn up by one of the U.K.’s big four accounting companies.
“It has definitely boosted HMRC's confidence with regard to accounting opinions,” she said. The big four firm, EY in this case, “will be very cross at how they haven't been able to get their views across.”
EY, which declined to comment, have been Greene King's auditors since the company last tendered its external audit contract in 1997. EY provided tax advisory support until July 31, 2014 and was paid a total of 1.63 million pounds in fees for its 2015 financial year, which included 100,000 pounds for tax related work.
Malcolm Joy, a London-based tax partner at accounting firm BDO, similarly described the ruling as an important result for HMRC, which highlighted the complexity of the tax avoidance schemes marketed to companies by accounting firms in the late 1990s and early 2000s.
“These kind of structures were very sophisticated,” he said. “I think part of what we've seen over past 15 years is a change in attitudes from the public and courts as they have become less sympathetic towards tax structures that are perceived as aggressive.”
Greene King received two notices of amendment from HMRC in January 2010 relating to the company's corporation tax returns for the periods ending April 2003 and April 2004, according to the Court of Appeal's written judgment.
The changes concerned a 300 million-pound loan made by Greene King Plc, the group's parent company, to one of its wholly owned subsidiaries in October 2000. EY's tax avoidance scheme, named Project Sussex, aimed for one company in the Greene King group to get tax relief on interest paid to another group company without that other company paying tax on the income it received.
A first-tier tribunal dismissed the appeal made by Greene King in 2012, two years after HMRC first contacted the brewing company about the 300 million-pound loan.
An upper tribunal then dismissed Greene King's second appeal in April 2014. Barrister David Milne of Pump Court Tax Chambers in London, arguing for the defense, described EY's scheme at the time as one that made what would otherwise be taxable income “vanish into thin air.”
The Court of Appeal's dismissal of Greene King's third appeal July 27 followed a three-day hearing earlier in the month. Yet the court gave the company a partial victory by upholding two grounds of appeal, based on the technical understanding of a loan relationship.
“The term ‘loan relationship’ is back to where we thought it was,” Self said. “The code is a comprehensive regime for taxing loans.”
Self noted that few U.K. companies adopt similar tax schemes today.
“The tax world has now moved on significantly,” she said. “The Revenue has won a number of cases with these complex financing schemes, and it's doubtful whether we'll see many more of them.”
“In the late 1990s and early 2000s, there were a lot of U.K.-to-U.K. double-dip financing structures that were being marketed,” Joy said. “In more recent years, there has been a much greater focus on cross-border tax arbitrage for groups—this has been seen as less aggressive, but more recently that has also been under challenge as a result of the base erosion and profit shifting initiative.”
Jim Hara, director general of business tax at HMRC, stressed HMRC's 80 percent win rate in tackling tax avoidance. “We will pursue taxpayers who participate in avoidance schemes,” he said, “whether they are individuals or large corporations.”
A spokesman for Greene King expressed disappointment on the lack of clarity in the case on double taxation and said that the firm is considering its options. “We are proud of the significant contribution we make to the UK and the Treasury and in the last financial year alone we paid 570 million pounds in taxes,” he said. “We always ensure we comply with tax regulations by following the advice of our legal counsel and taxation experts, including in this case, Ernst & Young LLP.”
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