UT remits £880m loan relationship dispute back to the FTT

In Barclays Bank plc v HMRC [2026] UKUT 212, the Upper Tribunal (UT) held that the First-tier Tribunal (FTT) had erred in law when determining that £3 billion was paid wholly for reserve capital instruments (RCIs) and not partly for warrants issued by Barclays plc (BPLC), the taxpayer's parent company.

Background

In 2008, at the height of the financial crisis, the Financial Services Authority instructed the major UK banks to increase their Tier 1 capital ratios. Barclays Bank plc's (BBPLC) response was to raise additional capital from new strategic investors. Those investors were the state of Qatar, through Qatar Holding LLC (Qatar) and Sheikh Mansour of Abu Dhabi, through PCP Gulf Invest 2 Limited and PCP Gulf Invest 3 Limited (PCP).

On 31 October 2008, BBPLC entered into the following two agreements with Qatar and PCP, respectively:

1. RCI Subscription Agreements, by which Qatar and PCP separately agreed to each subscribe for £1.5bn of RCIs; and
2. Warrant Subscription Agreements, by which Qatar and PCP separately agreed to acquire warrants to subscribe for ordinary shares in BPLC. The right to exercise the warrants was conditional on shareholder approvals and BBPLC receiving full payment for the RCIs.

On 27 November 2008, the RCIs were issued and BBPLC received £3bn.

BBPLC accounted for the £3bn cash received as representing £2.2bn for the RCIs and a capital contribution from BPLC of £800m. The £800m was treated as an accruing discount over the lifetime of the RCIs, and was recognised as a debit arising in relation to a loan relationship, for corporation tax purposes.

HMRC challenged this accounting treatment, contending that it was not in accordance with generally accepted accounting practice (GAAP) and that the full £3bn should have been recognised as the fair value of the RCIs.

FTT decision

The FTT found that BBPLC's accounting treatment was not in accordance with GAAP. It concluded that £3bn was paid to BBPLC for the RCI's and therefore £3bn represented the fair value of the RCIs, with no part of that sum being allocated to the warrants.

BBPLC appealed to the UT on the following two grounds:

1. The FTT's finding that as a matter of substance and economic reality Qatar and PCP paid £3bn for the RCIs was perverse and/or irrational because it defied commercial common sense.
2. Alternatively, the FTT erred in law by taking into account factors that were either wrong or irrelevant.

UT decision

The appeal was allowed.

With regard to ground 1, the UT did not accept BBPLC's submission that the only conclusion available to the FTT was that the £3bn was paid for the RCIs and the warrants. In the view of the UT, the FTT was right to consider, in some detail, the broader context in which the transactions took place. 

On ground 2, the UT concluded that the FTT had taken into account irrelevant factors when making its determination. For example, the FTT wrongly placed weight on press comment made at the time and wrongly considered that the warrants were only a 'sweetener', and that Qatar and PCP only got a good deal if the warrants were given away.

The UT was satisfied that had the FTT not erred in these respects, then it might have reached a different decision on the substance and economic reality of the transactions. The UT allowed the appeal on ground 2 and set aside the FTT's decision. The UT declined to remake the FTT's decision preferring instead to remit the case back to the FTT to reconsider its decision.

Comment 

The UT's decision demonstrates the difficulty taxpayers face when appealing findings of fact from the FTT.  Even though BBPLC was able to successfully demonstrate that the FTT had erred by taking into account irrelevant considerations, the UT decided to remit the appeal to the FTT to reconsider its decision and the ultimate outcome on the tax position therefore remains open.

Read the decision in Barclays Bank plc.