Profits remain taxable

The taxpayer business Vocalspruce was a subsidiary of B plc. In December 2003 B plc subscribed for zero coupon loan notes in several group companies.

The loan notes were transferred to Vocalspruce for shares issued with a nominal value equivalent to the value of the loan notes but also at a premium.

The terms were that the premium would be paid up by capitalising profits arising on the loan notes and appropriating those sums to Vocalspruce’s share premium account.

Vocalspruce believed the credit that would otherwise be taxable under the loan relationships rules would not be brought into account because the transactions fell within FA 1996 s 84(2)(a).

HMRC disagreed and amended Vocalspruce’s taxable profits.

In a test case for a number of similar matters First-tier Tribunal said s 84(2)(a) did not exclude the accrued profits on the...