Union Castle: is the ‘fairly represent’ test fair?

In Union Castle Mail Steamship Co Ltd v HMRC, the Court of Appeal dismissed the taxpayers’ appeals concerning the application of the derivative contracts rules to a scheme involving the issue of bonus shares which carried a right to substantially all of the returns on certain derivatives. The court found, inter alia, that the ‘fairly represent’ requirement for deductibility was not met. Following GDF Suez, ‘fairly represent’ was a separate and overriding condition that had to be satisfied in computing the debits and credits to be brought into account. The court’s conclusion that this requirement constitutes a free-standing override of accounting principles appears, in the author’s opinion, to be something of a one-way street: despite judicial comment that the principle was to be applied in an even-handed manner, there are no instances where this has happened.