HMRC wins £35m tax avoidance case with French bank

HMRC has won a tax avoidance case worth £35m against global banking group BNP Paribas, after a First Tier Tribunal (FTT) found in its favour in a case dating back to 2005

The tribunal heard the bank tried to use a tax avoidance scheme to claim an exemption from tax by generating an artificial loss on the purchase and sale of dividends without disposing of the underlying shares – a process known as ‘dividend stripping’.

HMRC confirmed that the tax avoidance was estimated to have caused losses of around £35m but could not give further details about the penalty due to client confidentiality.

The FTT confirmed HMRC’s view that legislation stopped financial traders claiming artificial losses by buying and selling dividends on shares and then claiming the sale proceeds are tax exempt.

The case was brought by BNP Paribas, which was appealing against additional corporation tax which HMRC sought to impose in relation to the purchase and sale of a right to certain dividends the bank undertook through its London branch (the in the accounting period ending 31 December 2005. [BNP Paribas SA (London branch) and the Commissioners for Her Majesty’s Revenue and Customs, [2017] UKFTT 487 TC05941]).

The London branch submitted its corporation tax return for that period on the basis that the transaction generated a trading loss of £96m. This loss arose, in its view, because the price paid for the right to the dividends was tax deductible from the profits of its banking trade but the sale price received was not a taxable receipt of that trade due to the operation of s 730(3) of the Income and Corporation Taxes Act 1988 (ICTA).  HMRC disagreed with both of these propositions.

The tribunal considered a complex web of relationships between different entities involved in the transaction.

The arrangement

In outline, on 13 December 2005, the dividend rights were created by a new company, Harewood Investments No.5 Ltd (HIL), issuing 1.5m ordinary shares to a subsidiary of BNP, BNP Luxembourg (BNP Lux), for a total subscription price of £210m. The shares carried the right to a dividend payable monthly at an effective fixed rate of 4.354% on an amount of £150m and to a termination dividend of a total of £150m payable no later than 15 December 2008.

On 14 December 2005, the London branch bought the right to the dividends from BNP Lux for £149,105,998. BNP Lux continued to own the shares.

On 15 December 2005, the London branch sold the right to the dividends to an unconnected party, Alliance & Leicester Investments Ltd (ALIL), for £150m.

At that time, the group also entered into funding and hedging arrangements with ALIL to enable HIL to meet its financial obligations and to hedge the group’s interest rate risk during the term of the on-going transaction (being the three-year period to the scheduled date for payment of the termination dividend). 

Under these arrangements, HIL deposited £209m of the funds it had received with BNP’s Dublin branch which agreed to pay interest on that amount over a three-year period at a fixed rate of 4.59%; and the Dublin branch placed the £209m with BNP’s Treasury function in return for floating rate of interest of one month Libor but agreed to swap that interest for interest calculated at a fixed rate of 4.74% on a total equivalent amount under swaps with ALIL’s parent, Alliance & Leicester plc, and BNP.

BNP Lux exited from the transaction the following year. Under a put option entered into on 31 January 2006, BNP Lux sold the shares on 18 April 2006 to a UK subsidiary of BNP, BNP PUK Holdings Ltd. (BNP UK) for £62.7m. BNP funded BNP UK by subscribing for shares in it for that amount.

The arrangement with ALIL ended before the scheduled end date on 30 November 2007 when ALIL received the termination dividend of £150m and the final fixed rate dividend.

In essence, the first issue in front of the FTT was whether the purchase and sale of the right to the dividends was made in the course of BNP’s banking and financial trade for corporation tax purposes.


HMRC’s position was that the transaction was undertaken with the object of achieving the benefit of the tax loss by utilising the provisions of s 730(3) ICTA. This meant that the transaction was not undertaken by the London branch in the course of its trade and thus no tax deduction is available to the London branch for the price paid for the right to the dividends.

BNP’s primary argument was that fiscal motive is not relevant in a case such as this: fiscal motive does not prevent what is, on an objective analysis, a trading transaction from being regarded as such. In any event, there are other commercial reasons for the transaction both from the perspective of the London branch alone and from that of the wider group.

The London branch intended to and did make a significant profit from the purchase and sale of the dividend rights on a before-tax basis (of just over £400,000). In effect, the group borrowed £150m at an attractive rate which resulted in a before-tax saving, after all costs, of just over £1.1m and a considerable after-tax profit taking into account the s 730 benefit.

A number of other issues were also raised. HMRC argued that, if it is held that the purchase and sale of the dividend rights was part of the London branch’s trade, the price paid by the London branch for the dividend rights was nevertheless not deductible for corporation tax purposes because it was not incurred wholly and exclusively for the purposes of the trade. BNP argued that a fiscal motive does not lead to this conclusion.

There were questions over whether s 730(3) ICTA has the effect, as BNP argued, of excluding the sale price received by the London branch from ALIL from being brought into account as a taxable receipt of the London branch’s trade, and whether it applied to the BNP Lux dealings.

The FTT dismissed BNP’s appeal and found in favour of HMRC for a number of reasons. The tribunal found that the transaction comprising the purchase and sale of the right to the dividends by the London branch was not undertaken by it in the course of its financial trade.

In any event, the price paid by the London branch for the acquisition of the right to the dividends was not incurred wholly or exclusively for the purposes of the London branch’s trade but at least in part (if not solely) for the purpose of realising the s 730 benefit. This meant HMRC was entitled to raise the s 730(3) argument.

Penny Ciniewicz, HMRC’s director general customer compliance, said: ‘Tax avoidance doesn’t pay. This decision adds to the comprehensive run of wins by HMRC in which the courts have found against the small minority of taxpayers who seek to avoid tax.

‘Increasingly, companies and individuals who have tried to avoid tax are throwing in the towel and paying the tax they owe.’

In a statement BNP Paribas said: ‘BNP Paribas respects the decision of the tribunal in relation to this transaction, which was entered into 12 years ago in 2005.

‘We did not appeal this decision and paid the tax amount in full before the tribunal was heard. BNP Paribas takes its tax obligations very seriously.

‘We pay taxes fully in accordance with UK legislation; voluntarily adopted the Code of Practice on Taxation for Banks in 2009; and maintain an open and wholly transparent relationship with HMRC at all times.’

BNP Paribas SA (London branch) and the Commissioners for Her Majesty’s Revenue and Customs, [2017] UKFTT 487 TC05941 is here.

Report by Pat Sweet

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