In GDF Suez Teeside Ltd v HMRC [2015] TC04590 the FTT concluded that the company's accounts did not fairly represent its profits, despite them being prepared in accordance with GAAP.
The transactions undertaken by the company were complex, involving loan relationships and a DOTAS registered scheme. The scheme involved establishing a subsidiary offshore in Jersey and transferring rights to it so that unrealised gains of £200 million were not recognised in the company's accounts.
The FTT agreed that the company's accounts were prepared in accordance with GAAP and that HMRC could therefore not substitute an alternative set of accounts.
Upon examination of the GAAP compliant accounts the FTT was persuaded that they did not fairly represent profits and could therefore be overridden in accordance with FA1996 s84(1) and s85A(1) (reproduced below). The £200 million credit should therefore be included in the taxable profits.
The FTT described this scheme as a 'structured transaction in which accounting rules have been used in order to both defer and potentially remove profits from the UK tax net'.
The effect was to remove potential gains from GDF Suez Teeside Ltd whilst they were still unrealised and therefore not included in accounting profits, and to ensure that when the gains were realised by the subsidiary that they were not within the UK corporation tax charge.
Comment
The general principle that the taxable profits of a trade are those profits which are determined under GAAP, with some statutory adjustments such as depreciation, is long established, and in a normal case accounting profits will give a fair view of taxable profits.
FTT wholeheartedly agreed with this general principle in making their decision but felt that this was not a 'normal case' due to the nature of the transactions involved. This was therefore a case where the accounting profits did not give a fair view of taxable profits and legislation at s84 and s85A allowed the FTT to override them.
The general principle is not disturbed by this case and it is unlikely that HMRC would seek to extend this decision beyond the bounds of the specific issues involved here.
s84 and s85A have been rewritten to CTA2009, see in particular s307.
Case reference: GDF Suez Teeside Ltd v HMRC [2015] UKFTT TC04590
Legislation
FA 1996 s84: Debits and credits brought into account
(1) The credits and debits to be brought into account in the case of any company in respect of its loan relationships shall be the sums which, when taken together, fairly represent for the accounting period in question
(a) all profits, gains and losses of the company, including those of a capital nature, which (disregarding interest and any charges or expenses) arise to the company from its loan relationships and related transactions; and
(b) all interest under the company’s loan relationships and all charges and expenses incurred by the company under or for the purposes of its loan relationships and related transactions
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FA 1996 s85A: Exchange gains and losses from loan relationships
(1) Subject to the provisions of the Chapter (including, in particular, section 84(1)), the amounts to be brought into account by a company for any period for the purposes of this Chapter are those that, in accordance with generally accepted accounting practice, are recognised in determining the company’s profit or loss for the period.
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