Versteegh – UK First-tier Tribunal finds no benefit to the parent from a downstream loan with the in-kind interest thereon paid to a sister subsidiary

A UK group of companies engaged in a childishly vacuous scheme to generate an interest deduction in one group company (the borrower) without a corresponding income inclusion to the lender or any other group company.  The parent lender made a loan to a subsidiary borrower on the basis that under the loan the borrower would be required to pay interest in the form of issuance of shares to a sister company.

It was held that the shares received by the sister company were income from a source (being the loan agreement) notwithstanding that it was not a party to the loan agreement.

Another issue was whether interest should instead be imputed to the parent on the basis that its exclusion of imputed interest from its accounts did not accord with GAAP. The Tribunal accepted the characterization of the taxpayer’s accounting expert, which was that the parent 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.  This sort of thinking would be helpful from a Canadian perspective if one were to worry (by broad analogy to the Vine case) about whether there was a shareholder benefit by virtue of the borrower issuing shares to the sister rather than to the parent.

Neal Armstrong.  Summary of Versteegh Ltd & Ors v. Commissioners, [2013] UKFTT 642 (TC), under s. 15(1) and s. 9 – exempt receipts.