“I confirm my acceptance of the adjudicator's conclusions as detailed in his letter of4 March 2016 in full and final settlement of this complaint about Clydesdale Bank.”
“the interest ratecharged on this new loan [Loan 5] would also take account of the revised break costs associated with breaking Loan 1[2] which will now reflect the shorter term of the revised Loan 1[2] as described above.”
“295 General rule: profits arising from loan relationships chargeable as income (1) The general rule for corporation tax purposes is that all profits arising to a company from its loan relationships are chargeable to tax as income in accordance with this Part. (2) But see section 465 (exclusion of distributions except in tax avoidance cases).”
“299 Charge to tax on non-trading profits (1) The charge to corporation tax on income applies to any non-trading profits which a company has in respect of its loan relationships. (2) For the meaning of a company having such profits and how they are calculated, see section 301.”
“307 General principles about the bringing into account of credits and debits (1) This Part operates by reference to the accounts of companies and amounts recognised for accounting purposes. (2) The general rule is that the amounts to be brought into account by a company as credits and debits for any period for the purposes of this Part in respect of the matters mentioned in section 306A(1) are those that are recognised in determining the company's profit or loss for the period in accordance with generally accepted accounting practice…”
“Part IV Enquiry into company tax return Notice of enquiry 39. 24(1) An officer of Revenue and Customs may enquire into a company tax return if he gives notice to the company of hisintention to do so (“notice of enquiry") within the time allowed. (2). If the return was delivered on or before the filing date, notice of enquiry may be given at any time up to twelve months from the day on which the return was delivered (subject to sub-paragraph (6)). (3). If the return was delivered after the filing date, notice of enquiry may be given at any time up to and including the 31st January, 30th April, 31st July or 31st October next following the first anniversary of the day on which the return was delivered. (4). If the company amends its return, notice of enquiry may be given at any time up to and including the 31st January, 30th April, 31st July or 31st October next following the first anniversary of the day on which the amendment was made. (5). A return which has been the subject of one notice of enquiry may not be the subject of another, except one given in consequence of an amendment (or another amendment) by the company of its return. (6). In the case of a company which is a member of a group other than a small group, the 12-month period in sub-paragraph (2) shall start not from the day on which the return was delivered but from the filing date. (7). In sub-paragraph (6) “group” and “small group” have the same meaning as in sections 474(1) and 383 of theCompanies Act 2006 .”
“22. An enquiry, begun by way of an enquiry notice, is concluded by a closure notice. The closure notice comprises two elements: (1) A statement of the officer’s conclusions; and (2) A statement of what, if anything, must be done to give effect to those conclusions. 23. The whole point of tax returns and enquiries into them is to ensure that the public interest in taxpayers paying the correct amount of tax is met. To that end, HMRC must have an appropriate ability to examine the return, but the taxpayer must have a fair opportunity to challenge (by way of appeal) either (i) the conclusions of HMRC or (ii) the manner in which those conclusions have been given effect to (by way of amendments to the return)…, a closure notice quite clearly contains – and must contain – both elements; equally, …, an appeal lies against both “any conclusion stated” or any “amendment made”. 24. It is important to appreciate that the conclusions of a closure notice are distinct from the amendments that may arise out of those conclusions. Obviously, there is a nexus between the two – the amendments implement the conclusions reached – but they are very different things. The conclusions in a closure notice consist of a statement why the taxpayer’s return is incorrect (if it is), whereas the amendments set out how the return must be corrected in order to give effect to those conclusions. A closure notice must state the officer’s conclusions; and having issued a closure notice, HMRC has no power to amend the relevant return other than to give effect to the conclusions: Bristol & West at [24]; Investec at [51].”
“…we must bear in mind that it is perfectly possible for the consequential adjustment in a closure notice itself to be in error, in that it fails to articulate the adjustment required by the conclusion articulated by the officer.”
“45. In my judgment the principles to be applied are those set out by Henderson J as approved by and elaborated upon by the Supreme Court. So far as material to this appeal, they may be summarised in the following propositions: (i) The scope and subject matter of an appeal are defined by the conclusions stated in the closure notice and by the amendments required to give effect to those conclusions. (ii) What matters are the conclusions set out in the closure notice, not the process of reasoning by which HMRC reached those conclusions. (iii) The closure notice must be read in context in order properly to understand its meaning. (iv) Subject always to the requirements of fairness and proper case management, HMRC can advance new arguments before the FTT to support the conclusions set out in the closure notice.”
“There is a venerable principle of tax law to the general effect that there is a public interest in taxpayers paying the correct amount of tax, and it is one of the duties of the commissioners [the predecessors of the FTT] in exercise of their statutory functions to have regard to that public interest...”
“Fair and reasonable redress means putting the customer back in the position they would have been in had the regulatory failings not occurred, including any consequential loss. What is fair and reasonable redress will vary from case to case and will be determined by a review of evidence and customer testimony. All redress offers will be scrutinised and approved by an independent reviewer.”
“1. Some customers would never have purchased a hedging product and will receive a “full tear up” of their interest rate hedging product (IRHP). These customers will receive a full refund of all payments on their IRHP. 2. Some customers would have chosen the same product they originally purchased whilst some customers may not have suffered any loss. These customers will receive no redress. 3. Some customers would still have sought or been required to enter into a product that provided protection against interest rate movements, but would have chosen an alternative product. These customers will receive redress based on the difference between the payments they would have made on the alternative product, compared with the payments they did make...”
“How the banks agreed to calculate redress under the review: Basic redress: The difference between actual payments made on the Interest Rate Hedging Product and those that the customer would have made if the breaches of relevant regulatory requirements had not occurred. Interest: The opportunity cost (loss of profits or interest) of being deprived of the money awarded as basic redress. The banks will either pay 8% a year of simple interest, or an interest level in line with: 1. an identifiable cost that the customer incurred as a result of having to borrow money; or 2. an identifiable interest rate that a customer has not earned as a result of having less money in the bank. Taking into account the economic environment over the last five years, interest will avoid many customers from having to put together consequential loss claims. Consequential loss: There are different types of consequential loss. A few examples are set out below: 1. Loss of profits over and above the interest paid on basic redress–: Customers should be aware that claims for loss of profits will require customers to show that they would have used the funds in question to generate a profit (for example, through a specific investment in the business). Any money invested in this way could not also have been earning interest in the bank at the same time and customers will not be able to ‘double recover’. Claims for loss of profits could result in the customer receiving an amount that is less than 8% simple interest on their basic redress if this is their actual loss. 2. Bank charges 3. Certain legal expenses 4. Tax (if a customer has to pay tax on their redress and this differs to what they would have paid had there not been a mis-sale) For each consequential loss claim, the onus is on the customer to demonstrate that the ‘legal tests’ are met (see below) … … Consequential losses (the cost of being deprived of money and other losses suffered) Banks agreed to automatically add 8% annual interest on top of basic redress payments to reflect opportunity costs (loss of profits or interest). Given the economic context over the past years, this has represented a straightforward and fair alternative to putting together consequential loss claims for most customers. If customers believe their lost opportunity amounts to more than the 8% simple interest they can put together a claim for consequential loss. All customers are invited to do this following the basic redress offer and there is no need to go to a claims management company. Consequential losses are assessed by reference to established legal principles relating to claims in tort and breach of statutory duty...”
“The basis of HMRC’s tax assessment is a false statement of fact concerning a forgone opportunity which HMRC have themselves identified (as being a fact). Specifically, HMRC treat the forgone opportunity not as the forgone opportunity it is, but as a payment of interest, even though it is not a payment of interest. It is not (even) a cash payment of any kind. It is simply a missed opportunity to benefit from a fall in loan prices due to using a (mis-sold) fixed rate of interest, rather than a floating rate that should have been used. In consequence, HMRC are treating one of their own facts as both true and false at the same time leading to an inherently false statement, and it is upon this false statement that HMRC have raised a tax assessment against the Company.”
“As you may be aware, the claim for ESC D33 relates to a compensation receipt received as part of an out-of-court settlement in relation to an allegedly mis-sold interest rate hedging product (IRHP)…our client currently accepts that the compensation they received from the out-of-court settlement is, insofar as material, on all fours with compensation that is received under the Financial Conduct Authority’s (FCA) Redress Scheme, for Small and Medium Enterprises (SMEs).”
“The final result of it all was as follows. The respondents recovered in full the physical damage to their jetty, amounting to£83,167 . They recovered by way of contribution towards their consequential loss the sum of£21,404 , and they also recovered the sum of£2,325 by way of interest, making a grand total of£106,897 . The question is whether that sum of£21,404 recovered from the tanker-owners in part satisfaction of the claim for loss of use is taxable as a trading receipt in the hands of the taxpayer company. … But it does seem to me that the question which we have to decide is eminently a question of fact, which depends on the answer to the question: What did the sum of£21,404 represent? To adopt a phrase used in one of the authorities to which we have been referred, what place in the economy of the taxpayers' business does this payment take?”
“If there had been no collision, the profits which the taxpayer company would have earned by the use of the jetty would plainly have been taxable as a trading receipt. Why, it may be asked, should not the same apply to the sum of money recovered from the wrongdoer in partial replacement of those profits?”
“I repeat, therefore, the question which I asked before: Why should not damages recovered under this head be regarded as a trading receipt, in that they represent the trading profit which the owner would have earned if he had had the use of his ship, or of his jetty? If that is not a correct view of the law, then I would venture to say that there is something very much wrong with the law, for the consequence would be that a jetty-owner, such as the taxpayer company, would be better off by being subjected to a casualty of this sort (that is, by losing the use his jetty and recovering damages thereof) than he would be if he were able to make use of it continuously for the purpose of making profits. That it seems to me would be a very strange result indeed.”
“I start by formulating what I believe to be the relevant rule. Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received, instead of the compensation. The rule is applicable whatever the source of the legal right of the trader to recover the compensation. It may arise from a primary obligation under a contract, such as a contract of insurance, from a secondary obligation arising out of non- performance of a contract, such as a right to damages, either liquidated, as under the demurrage clause in a charterparty, or unliquidated, from an obligation to pay damages for tort, as in the present case, from a statutory obligation, or in any other way in which legal obligations arise. But the source of a legal right is relevant to the first problem involved in the application of the rule to the particular case, namely, to identify what the compensation was paid for. If the solution to the first problem is that the compensation was paid for the failure of the trader to receive a sum of money, the second what I shall call for brevity an income receipt of that trade. The source of the legal right to the compensation is irrelevant to the second problem. The method by which the compensation has been assessed in the particular case does not identify what it was paid for; it is no more than a factor which may assist in the solution of the problem of identification. … In the present case the source of the legal right of the respondent trader was his right to recover from the owners of the tanker damages for the loss caused to him by the negligent navigation of the tanker. Damages for negligence are compensatory. His right was to recover by way of damages a sum of money which would place him, so far as money could do so, in the same position as he would have been in if the negligent act had not taken place.”
“In the present case the question is: On which side of the line does this payment of compensation fall? How is it to be characterised? As the judge pointed out, one can obviously say that the payment was made to compensate the tenant for the additional rent which it had to pay due to the negligence of the agent. That is a simple and obvious approach. Or one could look at it in another way by saying, as counsel for the taxpayer company would say, that the lease is now onerous and of lesser capital value because more rent is payable under it; therefore it has diminished its value as a capital asset. But for myself, there is no doubt that the conclusion of Walton J was correct and that there was no error of law in the same conclusion of the Special Commissioner. This compensation was paid in the context of a dispute as to what rent was payable by the taxpayer company to the landlord for the second period of the lease, having regard to the events which occurred in relation to the rent review clause. The failure to serve the counter-notice had the direct effect of increasing the rent. So if one asks oneself: What was the nature of the loss for which the compensation was paid—what was it paid for; what was its purpose?—it seems to me that it was obviously paid for the increased rent which the taxpayer company had to pay as the result of the negligence. That was the basis of the tenant's claim in negligence against Mr Clay, and the payment was made to settle that claim. The predominant feature or characterisation of this payment and of its purpose follow from these considerations…. Accordingly, I conclude that the judge was right in upholding the Special Commissioner... He said ([1987] STC 423 at 430): 'Now what was the£14,000 paid for? It was undoubtedly paid by the agent as damages for the agent's negligence which led to the damage which was suffered by the taxpayer company. And what was the damage suffered by the taxpayer company? The damage suffered by the taxpayer company was that for the remaining five years of the lease (or something of that order) the taxpayer company would have to pay a rent of£11,500 per annum in lieu of whatever the proper rent ought to have been.' … The judge added: 'It is of course possible to put the matter in the alternative form—and this is indeed what counsel for the taxpayer company, has attempted to do—and to say that the sum of£14,000 was damages for the diminution in value of the lease in the hands of the taxpayer company. That is undoubtedly the case, but why had the lease diminished in value in the hands of the taxpayer company? The answer to that question can only be that it was because there was more rent payable thereunder than would have been payable had the agent not been negligent. So it appears to me that, although there is an alternative way of putting the damage caused to the taxpayer company, there is no real difference in principle whatsoever. The damage is that from then on the taxpayer company had to pay more rent than otherwise it would have done.'”
“Although Diplock LJ refers to the trader's failure to receive a sum of money which would have been a revenue receipt, his principle must apply equally to compensation for his liability to pay a sum of money which was a revenue expense (see Donald Fisher (Ealing) Ltd v Spencer[1989] STC 256 ).”
“I think that Diplock LJ can safely be credited with having known that the duty of the court is to apply the language of the statute and not to add its own glosses or addenda.”
“39. In reaching my conclusion on this point, I cannot help but think of the words…which Willmer LJ started his judgment in Attwooll as follows: “In the course of the argument this has been made to appear to be a difficult and complicated case, but it is in fact a very simple case, and in my judgment a very plain case.” “In the course of the argument this has been made to appear to be a difficult and complicated case, but it is in fact a very simple case, and in my judgment a very plain case.”
“63. One can certainly say that the compensation was paid “for” the mis-selling but, in Lord Diplock’s terms, this simply establishes the “source of the legal right” which entitles the Appellants to compensation. It does not resolve the issue of the nature of the payment. 64. The solution to the “first problem” identified by Lord Diplock and further explained by Lord Hoffman is that the compensation was paid for the Appellants’ liability to pay a sum of money, that is the amounts payable under the swaps which they had to pay because the instruments had been mis-sold to them. 65. The “second problem” is whether the liability in respect of which the compensation is paid was a liability to pay money which was a revenue expense. The answer can only be that it was. The actual swap payments were deducted, and properly deductible, from the profits of the business. They were revenue expenses. It follows that the compensation paid by reference to those expenses must be a revenue receipt and must constitute taxable income in the hands of the Appellants.”
“45. In short, however compelling Mr Bowe’s proposition may be as a matter of the economic analysis of the events which transpired, it is simply not the case that the Basic Redress Element was paid in order to compensate the Appellant for his inability to obtain the Cap. Instead, the Basic Redress Element was paid in order to compensate the Appellant for the expenses which he incurred under the Swap – to the extent that those exceeded the expenses which he would have incurred under the Cap – and therefore the Appellant is subject to income tax in respect of his receipt of the Basic Redress Element. “46. … (1) the starting point in identifying the reason why the Basic Redress Element was paid is to consider the background to the making of the payment and the terms of the redress offer which Barclays made to the Appellant; (2) under the terms of the review which the FSA agreed with the banks, small and medium sized businesses (“SMEs” and each an “SME”) who were mis-sold IRHPs were entitled to fair and reasonable redress. As with any other tortious act, the legal principle involved was to put the relevant SME in the position in which it would have been had the mis-selling not occurred; (3) that is why the FCA in the extract from its website which is set out in paragraph 9 above referred to three distinct categories of SMEs which had been mis-sold IRHPs. The first category was those SMEs who would not have bought an IRHP at all if the misselling had not occurred. SMEs in that category were to be entitled to “receive a full refund of all payments under their IRHP”
“182. We reject Mr Bowe’s attempts to apply economic, philosophical, mathematical, semantic, logic based and linguistic theory at the expense of the law. Those tools may be valuable in certain circumstances, but not where the arguments obfuscate the facts of the case and the task of the Tribunal. Mr Bowe’s submissions start off on a wrong footing and continue in that vein. … 184. The basic redress was paid to put the Hacketts back in the position they would have been in but for the mis-selling in relation to their property rental business. We reject the submission at paragraph [123] above, that the receipt was not a part of the property rental business. The fact they could have used the money for other things is nothing to the point. The issue is what the compensation was for. And the answer to that is in our judgment clear.”
“… (3) In order to characterise a payment, first identify what the compensation was paid for (‘the first problem’) (Attwooll), (4) In doing so, the source of the legal right to compensation is only relevant to that question (Attwooll), (5) The method of calculating the compensation is no more than a factor which may assist answering that question (Attwooll), (6) Having identified what the compensation was paid for, decide whether the money in respect of which the sum has been paid would have been taxable as an income receipt had it been received (‘the second problem’) (Attwooll), (7) In doing so, the nature of the asset, from which the payment in issue is derived, has a strong influence on the characterisation of that payment. Where a person receives compensation for loss of income, the payment is a true substitute for, and therefore equivalent to, income (John Lewis), (8) The same is true where a person receives compensation for an expense, which has been incurred as a deductible expense from the profits arising out of a property business, it is chargeable to income tax (Attwooll, Deeny, Spencer).”
“95. We have not found Mr Bowe’s approach at all helpful. The FTT considered that the arguments (similar to those before us) obfuscate the facts of the case and the task of the Tribunal. We agree.”
“90. It seems to us that much of the confusion in this appeal has been caused by the fact that the Appellants have failed to understand that an opportunity cost is a concept used by economists not used in accounting principles or when determining tax liabilities arising from compensation payments such as those at issue in this case.”
“The appellant contends that the additional sum of 10,028l., though awarded under a power to add interest to the amount of the debt, and though called interest in the judgment, is not really interest such as attracts income tax, but is damages. The short answer to this is that there is no essential incompatibility between the two conceptions. The real question, for the purpose of deciding whether the Income Tax Acts apply, is whether the added sum is capital or income, not whether the sum is damages or interest. Before the coming into force of the Act of 1934, the rule at comon (sic) law prevailed that when an action for the payment of a debt succeeded the court could not add interest on the debt down to judgment unless interest was payable as of right under a contract expressed or implied... The added amount may be regarded as given to meet the injury suffered through not getting payment of the lump sum promptly, but that does not alter the fact that what is added is interest. This is the view taken by Evershed J., and by the Court of Appeal (du Parcq, and Morton L.JJ. and Cohen J.). Notwithstanding Mr. Grant's excellent argument, this view, in my opinion, is correct”
“The contention of the appellant may be summarily stated to be that the award under the act cannot be held to be interest in the true sense of that word because it is not interest but damages, that is, damages for the detention of a sum of money due by the respondents to the appellant and hence the deduction made as being required under r. 21 is not justified because the money was not interest. In other words the contention is that money awarded as damages for the detention of money is not interest and has not the quality of interest. Evershed J. in his admirable judgment rejected that distinction. The appellant's contention is in any case artificial and is in my opinion erroneous because the essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had had the use of the money, or conversely the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation. From that point of view it would seem immaterial whether the money was due to him under a contract express or implied or a statute or whether the money was due for any other reason in law. In either case the money was due to him and was not paid, or in other words was withheld from him by the debtor after the time when payment should have been made, in breach of his legal rights, and interest was a compensation, whether the compensation was liquidated under an agreement or statute, as for instance under s. 57 of the Bills of Exchange Act, 1882, or was unliquidated and claimable under the Act as in the present case. The essential quality of the claim for compensation is the same and the compensation is properly described as interest.”
“I certainly do not think it is essential to the nature of ‘interest’ that it should be a form of punishment for wrongdoing or a failure to perform an obligation; it suffices that it is a compensation by time for the use of money …”
“195. Turning to interest we are not seduced by the phrase opportunity cost used by the FCA in their scheme (see paragraph [49] above). That part must be read as a whole. The interest of 8% was an agreed rate designed to prevent many from submitting consequential loss claims. As noted the Hacketts have both received the interest and put in a consequential loss claim as they were entitled to do. 196. We can deal with this briefly as Mr Bowe did not concentrate on this aspect accepting in large part it would follow from our findings on the basic redress if we were against him. 197. Applying the principles set out in paragraph [172] above, first, there was a sum of money by which the ‘interest’ is calculated – the basic redress. Secondly, they were due to the Hacketts (about which there was no dispute). Thirdly, the fact they are added together makes no difference. Fourthly, they were compensation by time for use of money. The terms of the FCA scheme applied by the bank (see paragraph [49] above) make that clear. The election of 8% is a default and base line which is capable of change if evidence is adduced. That does not change the nature of the 8% interest, which the Hacketts accepted.”