Appeal Court’s decision boosts GAAR threat

The Inland Revenue has suffered a major court blow which, tax experts warned, could strengthen its determination to introduce a general anti-avoidance rule.

Appeal Court judges last week ruled in favour of a property company, Westmoreland Investments, which the Revenue claimed was engaging in tax avoidance.

Overturning an earlier High Court decision, the judges ruled transactions carried out by the company were of a genuine commercial nature and therefore not subject to anti-avoidance rules. Tax experts said the case marked the latest stage in the battle between taxpayers and the Revenue over what constitutes tax avoidance. A long-running series of cases has shifted the courts? definition in favour of the Revenue.

Applauding the Appeal Court?s decision in last week?s case, PricewaterhouseCoopers tax partner John Whiting said: ?This decision has rightly pulled the pendulum back in favour of the taxpayer.? However, he warned that the Revenue, which refused to comment on its defeat, was likely to take the case to the House of Lords.

The case involved interest payments made by the company to its parent, the Electricity Supply Pension Scheme.

Hit by a property slump in the 1970s, Westmoreland borrowed heavily from ESPS and, by 1987, owed it more than #42m in accrued interest.

Coopers & Lybrand, now part of PwC, advised ESPS to fund Westmoreland so it could pay the interest, crystallising tax losses which could be set off against future profits, making the company more attractive to potential purchasers.

One of the Appeal Court judges, Lord Justice Graham, said that, despite the ?blatant circularity of the payments made with the obvious purpose of achieving a tax advantage?, he considered the payment of interest to be classed as a loan agreement and therefore the discharge of a genuine liability.

As such, the tax losses should be available to be used to offset against taxes by Westmoreland.

Mike Warburton, senior tax partner at Grant Thornton, said: ?This is a case of the courts keeping the Revenue in check.?

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