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The taxpayer company (P) wished to sell half the shares in a subsidiary (W), but wanted to avoid the resulting corporation tax liability on the £8.5m gain.
To do so, P sold the shares to a newly acquired subsidiary, E, which sold them on the open market.
E subsequently incorporated three subsidiary companies; E and the subsidiaries then undertook derivative transactions in a scheme designed by a firm of accountants.
As part of the exercise, one of the subsidiaries was sold to an unconnected third party. A capital loss of £8.5m was claimed.
HMRC disallowed the claim. E’s appeal was allowed in part by the First-tier Tribunal.
The taxpayer and the Revenue both appealed to the Upper Tribunal, which allowed department’s appeal and dismissed the companies’.
The gains and losses on the derivative transactions did not have the character of income. They were designed to have fiscal significance but no commercial reality.
