Explainaway Limited Quartfed Limited Parastream Limited v Commissioners for Her Majesty's Revenue and Customs

Facts

Paul Rackham Limited ("PRL"), a UK company carrying on agriculture and property business, held shares in Waste Recycling Group plc and, advised by Deloitte & Touche, adopted a "Company Derivative Plan" to mitigate corporation tax on chargeable gains. Explainaway Limited was incorporated by formation agents on 20 February 2001 and acquired by PRL on 1 March 2001; it bought two million WRG shares from PRL intra-group and sold them into the market, realising a chargeable gain of £8,595,731. Explainaway then entered into matched long and short FTSE 100 futures contracts with Kleinwort Benson, closing the long contract in September 2001 at a loss of £8,804,846. When the intended sale of Explainaway to a capital loss company fell through, an extended scheme was implemented: three subsidiaries, Quoform, Quartfed and Parastream, entered into further derivative contracts in February 2002, financed by a £17.4 million loan to Explainaway. The Quoform Long Contract stood at a loss, was novated to Quartfed, and Explainaway sold Quoform to Mr and Mrs Austin, unconnected purchasers, for £10, claiming an allowable loss of £8,864,992. HMRC issued closure notices on 27 May 2008 denying the losses and the loan relationship debits, and Explainaway, Quartfed and Parastream appealed.