A tax avoidance scheme used by brewery Greene King which sought to exploit intra-company loans in order to generate tax relief on interest has won a partial victory at the Court of Appeal
The scheme, set up by EY in 2003, was used Greene King and other large groups, with the aim of gaining tax relief on interest paid to another group company without that other company paying tax on the income it received.
The arrangement involved the group company lending £300m to a subsidiary, Greene King Brewing and Retailing (GKBR) on which interest accrued. It subsequently assigned the right to receive the remainder of the interest to another subsidiary, Greene King Acquisitions (GKA) but retained the principal. At that point, £21.3m of interest remained with a net present value (NPV) of £20.5m.
In consideration of this, GKA issued £1.5m worth of preference shares to the group company which carried a special dividend of £975,000 to be followed by an annual dividend. Greene King continued to recognise the whole of the £300m debt in its accounts, while GKA recorded the right to receive interest as a receivable at its NPV of £20.5m, credited the nominal value of the preference shares (£1.5m) as a non-equity capital instrument, and credited the difference between the £1.5m and the NPV (£19m) to its share premium account.
On the basis of these ‘loan relationships’, Greene King made the case that it was not liable to tax on the £21.3m interest arising from the loan, although it did have to pay tax on the £970,000. It claimed GKA should pay tax on a sum of £768,000, representing the difference between NPV of the income stream on assignment (the £20.5m) and the amount actually received (£21.3m).
The Court of Appeal upheld the Upper Tribunal's ruling, with the caveat that GKA did have a loan relationship, meaning Greene King's appeal succeeded on that point.
So far in 2016-17, HMRC said it had clawed back a cumulative £648m of tax through their litigation avoidance successes.
A Greene King spokesman said: 'We accept the Court of Appeal’s decision on this long-running case. Greene King is a British business with a 217-year heritage and a major contributor to the Treasury with over a quarter of our turnover paid to HMRC. We are proud of the significant contribution we make to the UK and the Treasury and in the last financial year alone we paid £570m in taxes.
'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.'
The Court of Appeal's judgment is available here.
