One company in a group of UK companies (the "Lender") made a loan to a subsidiary (the "Borrower"). The loan terms obligated the Borrower to issue preference shares, in an amount equivalent to a market rate of interest on the loan, to another subsidiary of the Lender (the "Share Recipient"). The Borrower deducted that amount as interest, and no group company recognized interest income on the loan.
The Lender was not required under a specific provision to recognize interest income. That provision would have applied if the accounting method adopted by it (which was to not recognize interest income) could not be justified as conforming with GAAP. The Tribunal accepted the characterization of the taxpayer's accounting expert, which was that the Lender had made the loan in consideration for the right to receive back the principal plus the right to require a transfer of value between its wholly-owned subsidiaries, which latter right was of no incremental value to it, so that there should be no corresponding recognition of accounting income. It rejected the Crown expert's characterization that the transaction effectively was like an interest-bearing loan, but with the interest not being received directly, but invested by the Lender.
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