At appeal before the Upper Tribunal in the case, Bristol & West plc v the Commissioners for Her Majesty’s Revenue and Customs  [2014] UKUT 0073 (TCC), the judge ruled that Bristol & West transferred interest rate swaps to another Bank of Ireland subsidiary purely in the hope of securing a tax advantage.

Bristol & West attempted to take advantage of a perceived weakness in the rules on the taxation of swaps in the Finance Act 2002 by transferring a swap contact to Bank of Ireland Business Finance (BIBF), another of the bank’s subsidiaries, in return for a premium of £91m.

The bank expected the tax due to disappear due to the cancellation of the original ‘in the money’ interest rate swap contract and the replacement of a new one. This was because Bristol & West calculated its profits on an accruals basis, as allowed under the Finance Act 2002, while BIBF used the mark-to-market method.

The Upper Tribunal allowed Bristol & West’s appeal on a point that was originally upheld in HMRC’s favour in the First Tier Tribunal, involving a closure notice mistakenly sent out. However, they agreed with HMRC that the perceived loophole did not exist and the scheme did not work, allowing HMRC to collect the tax due in subsequent years.

David Gauke, Treasury secretary, said: ‘This case is the result of HMRC’s relentless work against a highly complex and speculative avoidance gamble that, unchallenged, would have deprived the country of over £27m in corporation tax. HMRC has shown that, no matter how complex or intricate the case is, it will not hesitate to litigate when the rules are being abused.’

HMRC said a further £215m was protected when other followers of the plan settled before being taken to tribunal.

The Upper Tribunal ruling is available here: http://www.tribunals.gov.uk/financeandtax/Documents/decisions/Bristol-West-v-HMRC.pdf