Unallowable purpose challenge

Loan relationship avoidance scheme

The taxpayer company took part in a complex avoidance scheme in 2004. The purpose was to create a tax loss in its 2005 accounting period and to enable it to be surrendered to companies in the BNP Paribas group.

The scheme relied on FA 1996 Sch 9 para 19A. This provided that a change in accounting policy that caused the carrying value of a loan relationship in a company’s accounts to change between the end of one period and the start of the next meant the difference should be treated as deductible or taxable in the later year.

The arrangement was notified to HMRC as an avoidance scheme and the taxpayer reported its use in its 2005 tax return. The Revenue opened an enquiry into the return and disallowed the trading loss.

After two decisions in favour of the taxpayer from the First-tier...