Share it

In the case of Her Majesty’s Revenue and Customs v DCC Holdings (UK) Limited [2010] UKSC 58 the Supreme Court were asked to consider the effect of a complicated tax avoidance scheme designed to create a loss for tax purposes for the taxpayer without it suffering a genuine economic loss.

The relevant legislation has subsequently been amended, and the perceived loophole which the taxpayer attempted to exploit has been closed. The case remains of interest, however, for the approach the court takes to interpreting legislation to counteract a tax avoidance scheme.

At its core, the scheme involved five repo transactions over gilts. As Lord Walker, delivering the judgment of the court, explained, a repo transaction is in legal form a preordained sale and purchase of the gilts at prices fixed in advance, but in economic substance it is a short term secured loan.

The tax legislation was designed to follow the economic substance of the transactions, and treat them as short term loans. It did this by deeming the repo transactions to give rise to a loan relationship between the parties to the repo transactions, and deeming credits and debits to arise under that relationship which were subject to tax.

Looking at the literal meaning of the relevant legislation the taxpayer had a good case: based on the repo transactions in question the legislation seemed to allow the taxpayer to claim a tax loss of £28.8 million whilst a taxable credit of only £2.9 million arose under the transactions.

However, this result was clearly unintended, and it was the “absurdity” of it which drove the court to seek an alternative outcome if at all possible. Lord Walker was of the opinion that “the need for a symmetrical solution lies at the heart of this appeal”. In other words, he approached the legislation by trying to interpret it in line with its purpose, which was to tax the repo transactions as if they were in fact a secured loan, with debits and credits of equal amounts arising under that loan (as they would have done if an actual loan existed and a payment of interest was made).

Lord Walker therefore concluded that the tax loss arising under that deemed loan should be the same as the taxable credit, £2.9 million. This conclusion is the fourth different conclusion reached by the courts as to the correct debits and credits which arose under the repo transactions in question. This highlights how complicated the legislation in question was. Of more interest, however, is Lord Walker’s focus on the underlying purpose of the legislation. There are many tax avoidance schemes which, at their core, seek to create an asymmetrical position like the one sought in the scheme being considered here. If the courts adopt the same approach as Lord Walker did here, and focus on the need to produce a symmetrical result, it is likely that those schemes will fail as well.