Tag: Loan relationship rules

UK vs Oxford Instruments Ltd, April 2019, First-tier Tribunal, Case No. [2019] UKFTT 254 (TC)

At issue in this case was UK loan relationship rules – whether a note issued as part of a structure for refinancing the US sub-group without generating net taxable interest income in the UK had an unallowable purpose and the extent of deductions referable to the unallowable purpose considered. The Court ruled in favor of the tax administration: “Did the $140m Promissory Note secure a tax advantage? 110.     In my view, the $140m Promissory Note secured a tax advantage for OIOH 2008 Ltd in that all of the interest arising in respect of the note (apart from 25% of the interest on $94m of the principal amount of the note) was set off against the taxable income of OIOH 2008 Ltd.  Those interest deductions were accordingly a “relief from tax†falling within Section 1139(2)(a) of the CTA 2010. 111.     I consider that that would be the case even if I had accepted Mr Ghosh’s submission to the effect that, because the Scheme was a single structure, the deductions arising as a result of step 8 of the Scheme should be regarded as inextricably linked to the additional interest income generated by steps 1 to 7 of the Scheme in OIOH 2008 Ltd, with the result that the single structure gave rise to no net deductions for tax purposes.  This is because I agree with Ms Wilson that the mere fact that a transaction happens to result in a net neutral tax position or even, as was the case here, a net positive tax position (as a result of the Disclaimer) does not mean, in and of itself, that there has been no “tax advantageâ€, as defined in Section 1139 of the CTA 2010. In a case where that net neutral or net positive tax position arises as a result of both the generation of income and the generation of deductions, the deductions are still reliefs from tax pursuant to which the amount of income giving rise to tax is reduced.  Consequently, in the words of Jonathan Parker LJ in Sema, it is a situation where “the taxpayer’s liability is reduced, leaving a smaller sum to be paid…[and]  a better position has been achieved vis-à-vis the Revenue.†112.     In keeping with his position as referred to in paragraph 111 above, Mr Ghosh contended that a straightforward borrowing between two companies within the UK tax net in which the debits in the borrower exactly matched the credits in the lender should also not be regarded as giving rise to a tax advantage.  For the reason set out in paragraph 111 above, I also do not accept that contention. It seems to me that that transaction would be giving rise to a tax advantage (for the borrower) in the form of the deductions which it generated, regardless of the fact that there would be income in the lender which matched those deductions. Of course, the fact that that matching income existed might well be highly relevant in considering whether securing the borrower’s tax advantage was the main purpose, or one of the main purposes, of the borrower in entering into the borrowing, but that is a quite separate question. 113.     Having said that, it will be apparent from the findings of fact set out in paragraph 104 above that I have not accepted the basic premise on which the submissions set out in paragraphs 111 and 112 above are founded.  In other words, I do not accept that the current circumstances should be regarded as being akin to those pertaining where the same loan relationship gives rise to matching debits and credits. Instead, step 8 of the Scheme generated only debits and no credits and was implemented only after the US objectives which were one of OI Plc’s main purposes in procuring the implementation of the Scheme had been achieved by the implementation of steps 1 to 7 of the Scheme. The issue of the $140m Promissory Note was therefore a quite separate step from the steps which gave rise to the income in OIOH 2008 Ltd, a significant part of which was set off against the deductions to which the note gave rise. In those circumstances, it is difficult to see how the deductions to which the $140m Promissory Note gave rise should not be regarded as reliefs falling within the “tax advantage†definition. 114.     For completeness, although neither party referred to this part of the “tax advantage†definition in its submissions, I would have thought that the debits in this case might also fall within paragraph (c) of the definition of “tax advantage†in Section 1139(2) of the CTA 2010, as clarified by Section 1139(3) of the CTA 2010 – in other words, that the debits have given rise to “the avoidance or reduction of a charge to tax…by a deduction in calculating profits or gainsâ€. Was that tax advantage a main purpose of the Appellant? 115.     Section 441 of the CTA 2009 applies to the Appellant in relation to the $140m Promissory Note only if securing the tax advantage to which I have referred above was the main purpose, or one of the main purposes, of the Appellant in issuing, and remaining party to, the $140m Promissory Note. 116.     I have already concluded in my findings of fact that the sole purpose of the Appellant in issuing, and remaining party to, the $140m Promissory Note was to secure the deductions arising in respect of the note and to surrender those deductions to OIOH 2008 Ltd.  It follows that, in my view, the Appellant’s only purpose in issuing, and remaining party to, the $140m Promissory Note was to secure a tax advantage for OIOH 2008 Ltd and that therefore Section 441 of the CTA 2009 applies to the Appellant in relation to the note. What debits are apportionable to the unallowable purpose? 117.      It also follows from that finding of fact that, on the just and reasonable apportionment required by Section 441(3) of the CTA 2009, all of the debits arising in respect of the $140m Promissory Note were attributable ...