HMRC had claimed that Fidex Ltd, the bank’s subsidiary, was using artificial accounting arrangements, and said the latest ruling  would protect more than £17m in tax.

The Court of Appeal heard that the tax avoidance scheme called Project Zephyr, which was set up in 2004, aimed to create a loss of around €84m (£65.5m) in the hands of Fidex which would be available for group relief throughout the BNP Paribas group of companies of which Fidex forms a part. [ Fidex Ltd and the Commissioners for Her Majesty's Revenue & Customs, [2016] EWCA Civ 385].

Under the scheme, Fidex’s shares were acquired by the bank. Fidex then issued four classes of preference shares, matched by four bonds. It  went on to decide that, for the year ending 31 December 2005, it would change the accounting principles used in making up its accounts from UK GAAP to IFRS.

Fidex's 2004 accounts, prepared under GAAP, showed both the preference shares and the bonds on its balance sheet. However, in Fidex's 2005 accounts, prepared under IFRS, neither the preference shares nor 95% of the bonds were shown on its balance sheet since the terms of the preference shares and the economic qualities of the bonds cancelled each other out and the IFRS accounting policy required them to be ‘derecognised’.

The Court of Appeal heard that the 1996 Finance Act provided that if such a change in accounting policy in drawing up a company's accounts from one period to the next created a difference in the accounting value of an asset representing a loan relationship of the company at the end of the earlier period and the beginning of the later period, then a corresponding debit or credit had to be brought into account in the later period.

The bonds were a loan relationship and the reduction in their value was €84m. So in its tax return for 2005 Fidex claimed a debit of €84m, giving rise to a corresponding trading loss.

The Court of Appeal hearing centred on the Upper Tribunal’s (UT’s) decision relating to two earlier appeals from a First Tier Tribunal (FTT). One related to the terms of a particular closure notice, and the second to whether the UT fell into error in finding that the debit in issue was wholly attributable to an unallowable purpose.

On both counts, the Court of Appeal dismissed Fidex’s appeal. The judge stated: ‘I agree with the UT that the answer to this question is quite clear. The debit arose from and was entirely attributable to Project Zephyr. But for this tax avoidance scheme there would have been no debit at all.

‘I therefore believe the Upper Tribunal came to the right conclusion. On a just and reasonable apportionment, the debit was wholly attributable to an unallowable purpose.’

Jim Harra, HMRC’s director general business tax, said: ‘This is another important win against tax avoidance. The scheme was being used by the subsidiary of a major bank to dodge tax and the Court of Appeal has confirmed that it doesn’t work.

‘HMRC will always take on schemes like these on behalf of the vast majority of taxpayers who play by the rules and pay their share.’

The Court of Appeal decision on Fidex and the Commissioners for Her Majesty's Revenue & Customs is here