Wider business purpose prevents £34 million P&L deduction

In Swiss Centre Limited v HMRC [2023] TC08825, the First Tier Tribunal (FTT) denied a deduction in the P&L of £34 million paid as it was not a loan relationship debit, nor was it enhancement expenditure for a capital asset.

• Mr McAleer and Mr Laverty built up a construction, development and investment business that became one of the largest property businesses in Northern Ireland. The business was spread across many companies and trusts. All of the inter-connected businesses were known as the MAR Connection. The companies within that group that were party to the transactions subject to this appeal are:
  • Leicester Square Investments Ltd (LSI): held directly by one of the trusts within the business.
  • Swiss Centre Limited (SCL): a subsidiary of LSI.
  • Lavangna Limited: an Irish incorporated company involved in property development.
• The business as a whole was supported by a number of Loans from third-party banks. When the Financial Crisis of 2008 hit, the business found that a number of companies could no longer support the debt due to the ensuing property crash. The companies' values were much lower due to the lower property values.
• SCL owned a property, the Swiss Centre, which was being redeveloped into a luxury hotel and apartments. The project was funded through a facility agreed between LSI and a subsidiary of Allied Irish Banks (AIB). 
• The Swiss Centre was also used as security by SCL for a guarantee issued on a loan to Lavangna for its own property development projects.
• By 2010, a number of the loans to the business were taken on by NAMA, an Irish Government Agency set up during the Crisis to take on questionable debt and maximise recovery rates. These included the LSI facility and the Lavangna security/guarantee.
• Realising that if any of the banks or NAMA sought to recover the loans, there was a significant risk to the business, the decision was made to sell the Swiss Centre to repay some of the debt.
• In order to sell the property, the security held over it by NAMA needed to be released. In return, NAMA wanted a large proportion of the sales proceeds in order to recover as much of the MAR Connection debt as possible.
• After much negotiation, Mr McAleer and Mr Laverty agreed to pay NAMA £163 million from the sales proceeds of £197.5 million under a deed to prevent NAMA pursuing all of the debt and potentially triggering similar action from other lenders.
• The cost to SCL for entering into this deed was just under £34 million, which included €11.5 million in relation to the Lavangna guarantee. The £34 million was taken to the P&L as an expense and it was the deductibility of this amount that was challenged by HMRC, without which an additional £29.5 million was due under a Discovery Assessment. SCL appealed the assessment.

The FTT heard that the £34 million was deductible either because of a loan relationship (the Lavangna guarantee) or as Enhancement expenditure to be offset against the sales proceeds from the sale of the Swiss Centre. HMRC argued that it was instead a payment made to further the interests of the MAR Connection as a whole and to save the reputation of the ultimate shareholders, Mr McAleer and Mr Laverty. 

• When considering Part 5 CTA 2009, the loan relationship rules require the following in order to secure an allowable debit:
  • The company must be a debtor or creditor in relation to a money debt, which can include securities.
  • The debt arises from a transaction linked to the lending of money. This can include related transactions.
  • The amount must be recognised in the P&L in accordance with GAAP.
  • The loan cannot be for an unallowable purpose, i.e. the transaction must be within the business or commercial purposes of the company (wholly and exclusively).

The FTT assessed whether SCL became a creditor to a loan relationship at any point:

• HMRC agreed there was a loan relationship between SCL and LSI for the Swiss Centre facility and the release of the security by NAMA was a related transaction. However, the payment was linked to the debt owed by other MAR Connection companies and not the security.
• In terms of the Lavangna guarantee and the €11.5 million paid to NAMA by SCL on behalf of Lavangna, this was not a transaction for the lending of money. Paying a debt on someone else's behalf only becomes a loan relationship if there is an intention to create a loan and this was not the case.

Whilst the FTT did not need to further explore the point as there was no transaction related to a loan relationship established, the judge did state that had there been one, the question of unallowable purpose would have arisen.

The FTT then considered possible expenditure for capital gains purposes:

• In order for an expense to be classed as enhancement expenditure, as per s.38 (1)(b) TCGA 1992, it must be:
  • Wholly and exclusively incurred on the asset.
  • The expenditure must be reflected in the state or nature of the asset.

For this, the intention of SCL needed to be examined. The key decisions here were made by Mr McAleer and Mr Laverty for the benefit of a number of companies within the MAR Connection. This was the overriding driver for the deed and as such, the payment was not made wholly and exclusively for enhancing the value of the Swiss Centre.

The appeal was dismissed.

Useful guides on this topic

Loan Relationships
What is a loan relationship? How are profits and losses made from loan relationships taxed? What happens if loans are written down or written off? What is the difference between a trading and non-trading loan relationship? What are the rules for connected party loans?

How to calculate a capital gain or loss
How do you calculate a capital gain or loss? What costs are deductible? How can losses be utilised against capital gains?

CGT: Reporting when & how?
How do you report your capital gains? What return do you use? There are different ways for individuals to report capital gains depending on whether you are resident or non-resident, and whether you are in or out of Self Assessment. 

Wholly and exclusively...toolkit
When is an expense allowed for tax purposes? What does 'wholly and exclusively' mean? How do you determine if a cost is wholly and exclusively incurred for the purpose of a trade? What cases are there?  

External link

Swiss Centre Limited v HMRC [2023] TC08825