Memorandum submitted by HMRC (DFoB 46)
DAIRY FARMERS OF BRITAIN
Thank you for your letter of 22 January to my
colleague Julie Calloway about Dairy Farmers of Britain (DFOB).
I am replying as the head of the Policy Group that includes Capital
Gains Tax.
You asked HMRC to provide some further information
and clarification on three particular points:
— The tax implications of the debt for
equity swap and what the tax position would be if the swap had
not taken place.
— The time it took for HMRC to issue guidance
on the tax treatment.
— The clarity of HMRC's guidance as published
in Revenue and Customs Brief (01/10) (R&C brief) issued on
14 January 2010.
Our replies are as follows:
THE TAX
IMPLICATIONS OF
THE DEBT
FOR EQUITY
SWAP
Balances owed to members
1. Members sold their milk to DFOB and,
in accordance with the agreement between the two parties, a fraction
of the income earned by members was placed in Members Investment
Accounts (MIAs). These were known as "milk retentions".
2. Although the milk retentions were not
paid directly to members, they were nonetheless income of the
members, and should have been included in turnover when members
prepared their annual financial accounts. However, where accounts
are approved after the appointment of the Receiver (3 June 2009)
accountancy practice directs that income credited to MIAs after
the accounting date of the last previously approved accounts need
not be included in turnover. Excluding milk retentions from turnover
gives members effective relief from income tax for the milk retentions
lost. But financial accounts approved before 3 June 2009 cannot
be reopened by reason alone of DFOB going into receivership.
3. As a result of the crediting of milk
retentions to MIAs, members became creditors of DFOB. The milk
retentions were debts owed by DFOB to the members. Whilst these
debts are capital assets, they have the characteristics of a simple
debt and so are not chargeable assets for capital gains tax purposes.
This means any capital gain on disposal of the debt would not
be a chargeable gain and nor would any capital loss be an allowable
loss.
4. When the debts within the MIAs and Members'
Capital Accounts (MCAs) were exchanged for "A" shares
in DFOB on 27 March 2009, those debts were fully satisfied by
the issue of the shares. As a consequence no allowable losses
arose on the balances in MIAs and MCAs up to that date.
5. Papers supplied to HMRC indicate that
no further sums were credited to MCAs, so no capital losses arose
on those accounts. However, we have recently become aware that
further milk retentions were credited to MIAs after the conversion
of the debt in March 2009. These milk retentions should be excluded
from turnover in financial accounts approved after the appointment
of the Receiver, in accordance with accountancy practice. Again,
excluding these milk retentions from turnover gives effective
relief from income tax.
6. HMRC understand that the Members Liability
Loan Accounts (MLLAs) were not involved in the debt for equity
swap in March 2009. The swap therefore had no tax implications
for monies in MLLAs.
The shares received by members
7. Turning then to the treatment of the
shares members received in March 2009. As the debts exchanged
for shares were simple debts, the allowable cost of the shares
cannot exceed their market value at the time they were issued.
We think that the market value of the shares will be the same
as the value of the debt at the time of the exchange, and, from
the evidence we have seen, that figure is likely to be, or to
be close to, zero. It therefore seems likely that the cost of
these "A" shares is nil, which would mean that no capital
losses can arise from these shares. We are, though, inviting representations
as to the appropriate figure of cost.
8. "A" shares issued in exchange
for the Preference shares take on the cost of the Preference shares
so these "A" shares may give rise to capital losses.
Tax consequences had there been no debt for equity
swap
9. You ask what the tax consequences would
have been if the debt for equity swap had not taken place. This
transaction does not have any effect on the income tax relief
available. But had the MIA and MCA debts not been satisfied by
the issue of shares, it might have been possible to claim allowable
capital losses in respect of any outstanding amounts of the principal
that were not allowable for income tax purposes and which had
at the time of claim become irrecoverable.
Why did it take more than six months for HMRC
to issue guidance?
10. The receiver first contacted HMRC in
July 2009 about whether members would be entitled to Income Tax
relief in respect of the debt held in DFOB. The difficulty faced
by all interested parties was the lack of documentation surrounding
the various debts. We weren't in a position to give advice on
the Capital Gains Tax position until the Receiver supplied necessary
factual information at the end of 2009. The R&C brief was
then published shortly after this on 14 January 2010.
Concerns over the clarity of HMRC's guidance
11. There are two points of clarity recently
raised by the Receiver and we are now in a position to clarify
the guidance. The Receiver has kindly agreed to review our newly
revised draft prior to publication to ensure that HMRC's views
as expressed in the updated guidance are clear. At the time of
preparing this response HMRC was hopeful of having the revised
guidance published by the middle of February.
12. In a response to a request from the
NFU the R&C Brief will include guidance on the impact of the
debt owed to corporate members by DFB.
13. Having considered representations we
are setting out our views in an update to R&C brief 01/10.
There may be certain aspects where professional advisers incline
to a different view but it would not be appropriate to debate
differences of interpretation in published guidance. We shall
be responding separately to particular representations.
HMRC
February 2010
| 
