No mismatch

The taxpayer company transferred a swap contract in August 2003 to its sister business Bank of Ireland Business Finance (BIBF) for £91m in the hope of exploiting a loophole in the derivatives transitional provisions in FA 2002 which changed the tax rules for the swap from an accruals to a mark-to-market basis.

The new regime applied to companies’ first accounting period beginning on or after 1 October 2002. The transfer fell within BIBF’s accounting year beginning on 1 September 2002 which meant the arrangement fell in the previous FA 1994 swaps regime.

The intention was that the £91m paid to the taxpayer would fall out of charge relying on the rollover rule in FA 2002 Sch 26 para 28 while BIBF would be taxed on future changes in value of the swap.

HMRC said the rollover rule did not apply and the...