At issue was an intra-group loan that arose out of a reorganisation designed to accelerate the utilisation of tax losses and thereby generate tax savings for the Kwik-Fit group. According to the tax authorities the loan had an unallowable purpose under the rule in section 441 CTA 2009 and, on this basis, interest deductions on the loan were disallowed. Kwik-Fit´s appeals to the First-tier Tribunal and the Upper Tribunal were unsuccessful and an appeal was then filed with the Court of Appeal. Judgment The Court found that the unallowable purpose rule in section 441 CTA 2009 applied to the interest deductions and upheld the decisions of the First-tier and Upper Tribunals. Excerpt 35. The FTT then made the following findings: “101. We find, based on the evidence of Mr Ogura,that: (1)   the decision to implement the reorganisation was made as a whole group; the Appellants were part of that group so they understood and cooperated in that decision; (2)   the June 2013 Memorandum sets out what the directors of each company wanted to achieve, both for themselves and for the other members of the Kwik-Fit Group. That group purpose (as set out in that memorandum) was to create net receivables within Speedy 1, to enable utilisation of the losses in Speedy 1, and tax deductions for the interest expense of each debtor. That outcome was considered to be good for the whole group; (3)   an additional group purpose of thereorganisation was to simplify the intercompany balances within the Kwik-Fit Group; (4)   each of the Appellants knew the full details of the reorganisation which was being implemented, the steps they were required to take to implement that reorganisation, whether for themselves or as shareholder of another company involved in the reorganisation and understood as a matter of fact that the reorganisation had the effect of assigning the receivables under the Pre-existing Loans to Speedy 1. They understood that this was “for the benefit of the whole group”; and (5)   each of the Appellants had a choice as to whether or not to participate in the reorganisation, and if they had decided not to do so then the Pre-existing Loans to which they were party would have been left out of the reorganisation. The only potential reason for not participating given by Mr Ogura was if they had not wanted to pay the increased interest rate on those loans. (…) “88. In this case, the FTT’s conclusions were based on very particular factual features: a)The “group purpose” of the reorganisation, which the Appellants willingly adopted, was to achieve the tax benefits that I have already described: para. 101 of the FTT Decision, set out at [] above. b)There was an additional group purpose of simplifying intercompany balances (para. 101(3)), but that was clearly not considered by the FTT to be material. Further, the long-term aim of reducing the number of dormant companies was “merely part of the background noise”: para. 104 ([] above). c)The Appellants had a choice as to whether or not to participate in the reorganisation, the only reason given for not doing so being if they had not wanted to pay the increased rate of interest (para. 101(5)). d)The Pre-existing Loans were repayable on demand and the Appellants had little capacity to repay them, but there was no threat to call for their repayment. Instead, the Appellants understood that the increased interest rate “directly fed into the tax benefit for the group”. (See para. 102, set out above; the points are reiterated at para. 112.) In other words, the Appellants willingly agreed to take on the obligation to pay significant additional interest without any non-tax reason to do so. In contrast, if payment of interest at a commercial rate on a loan is the alternative to being required to repay it in circumstances where funds are still required, then that may well provide a commercial explanation for the borrower’s agreement to the revised rate. e)The increase in rate also had nothing to do with any recognition on the part of the Kwik-Fit group that it needed to make the change to avoid falling foul of the transfer pricing rules. There was no such recognition. The interest rate on the relevant loans was not set at LIBOR plus 5% because of a concern that the transfer pricing rules would otherwise be applied to adjust the rate upwards. Rather, the rate was set at LIBOR plus 5% to maximise the savings available while aiming to ensure that it was not objected to by HMRC as being excessive because it was above an arm’s length rate. Setting the rate at a level that sought to ensure that it did not exceed what would be charged at arm’s length i) meant that it could be accepted by the borrowers and ii) reduced the risk that the rate would be adjusted downwards for tax purposes, which would reduce the benefits available. The assumption was that the transfer pricing rules would not otherwise be applied to increase the interest rate. f)Mr Ghosh frankly acknowledged that the transfer pricing rules did not motivate the increase in rate, but the point is also made very starkly by the FTT’s findings that the Appellants could have chosen not to participate and that the interest rate would not have been increased on the Pre-existing Loans if they had not done so (paras. 101(5) and 102(4)), and by the group’s decision not to increase the rate of interest on other intra-group debt, including the Detailagent Loan (paras. 30 and 115; see [] and [32.] above). g)The result was that, although the commercial purpose for the Pre-existing Loans remained, the only reason for incurring the additional interest cost on the Pre-existing Loans was to secure tax advantages: para. 113 ([] above). The new rate was “integral” to the steps taken: para. 116 ([37.] above). h)As to the New Loans, the FTT found at paras. 103 and 117 that KF Finance and Stapleton’s did not have their own commercial purpose in taking them on and that the intended tax advantages were the main purpose for which KF Finance and Stapleton’s were party to them ([] and [37.] above).” Click here for translation ...

In 2009 the BlackRock Group acquired Barclays Global Investors for a total sum of $13,5bn. The price was paid in part by shares ($6.9bn) and in part by cash ($6.6bn). The cash payment was paid by BlackRock Holdco 5 LLC – a US Delaware Company tax resident in the UK – but funded by the parent company by issuing $4bn loan notes to the LLC. In the years following the acquisition Blackrock Holdco 5 LLC claimed tax deductions in the UK for interest payments on the intra-group loans. The tax authorities (HMRC) denied tax deductions for the interest costs on two grounds: (1) HMRC claimed that no loans would have been made between parties acting at arm’s length, so that relief should be denied under the transfer pricing rules in Part 4 of the Taxation (International and Other Provisions) Act 2010. (2) HMRC also maintained that relief should be denied under the unallowable purpose rule in section 441 of the Corporation Tax Act 2009, on the basis that securing a tax advantage was the only purpose of the relevant loans. An appeal was filed by the BlackRock Group with the First Tier Tribunal, which in a decision issued in November 2020 found that an independent lender acting at arm’s length would have made loans to LLC5 in the same amount and on the same terms as to interest as were actually made by LLC4 (the “Transfer Pricing Issue”). The FTT further found that the Loans had both a commercial purpose and a tax advantage purpose but that it would be just and reasonable to apportion all the debits to the commercial purpose and so they were fully deductible by LLC5 (the “Unallowable Purpose Issue”). An appeal was then filed with the Upper Tribunal by the tax authorities. According to the judgment issued in 2022, the Upper Tribunal found that the First Tier Tribunal had erred in law and therefore allowed HMRC’s appeal on both the transfer pricing issue and the unallowable purpose issue. The First Tier Tribunal’s Decision was set aside and the tax authorities amendments to LLC5’s tax returns were confirmed. An appeal was then filed by BlackRock with the Court of Appeal. Judgment The Court of Appeal found that tax deductions for the interest on the Loans were not restricted under the transfer pricing rules (cf. ground 1 above) but instead disallowed under the unallowable purpose rule in section 441 of the Corporation Tax Act 2009 (cf. ground 2 above). Excerpt regarding application of transfer pricing rules “34. Paragraph 1.6 of both the 1995 and 2010 versions of the OECD guidelines explains that what Article 9 of the model convention seeks to do is to adjust profits by reference to “the conditions which would have obtained between independent enterprises in comparable transactions and comparable circumstances” (a comparable “uncontrolled transaction”, as opposed to the actual “controlled transaction”). The 2010 version adds that this comparability analysis is at the “heart of the application of the arm’s length principle”, while explaining at para. 1.9 that there are cases, for example involving specialised goods or services or unique intangibles, where a comparability analysis is difficult or complicated to apply. 35. In its discussion of comparability analysis, para. 1.15 of the 1995 version states: “Application of the arm’s length principle is generally based on a comparison of the conditions in a controlled transaction with the conditions in transactions between independent enterprises. In order for such comparisons to be useful, the economically relevant characteristics of the situations being compared must be sufficiently comparable. To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or that reasonably accurate adjustments can be made to eliminate the effect of any such differences. In determining the degree of comparability, including what adjustments are necessary to establish it, an understanding of how unrelated companies evaluate potential transactions is required. Independent enterprises, when evaluating the terms of a potential transaction, will compare the transaction to the other options realistically available to them, and they will only enter into the transaction if they see no alternative that is clearly more attractive. For example, one enterprise is unlikely to accept a price offered for its product by an independent enterprise if it knows that other potential customers are willing to pay more under similar conditions. This point is relevant to the question of comparability, since independent enterprises would generally take into account any economically relevant differences between the options realistically available to them (such as differences in the level of risk or other comparability factors discussed below) when valuing those options. Therefore, when making the comparisons entailed by application of the arm’s length principle, tax administrations should also take these differences into account when establishing whether there is comparability between the situations being compared and what adjustments may be necessary to achieve comparability.” Similar text appears at paras. 1.33 and 1.34 of the 2010 version. 36. As can be seen from this, it is essential that the “economically relevant characteristics” are “sufficiently comparable”, in the sense of any differences either not having a material effect on the relevant condition (term) of the transaction, or being capable of being adjusted for with reasonable accuracy so as to eliminate their effect. 37. Paragraph 1.17 of the 1995 version expands on the concept of differences as follows: “… In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm’s length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm’s length dealings. Attributes that may be important include the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the economic circumstances of the parties, and the business strategies pursued by the parties…” Again, this is reflected in the 2010 version, at ...

JTI Acquisitions Company Ltd was a UK holding company, part of a US group, used as an acquisition vehicle to acquire another US group. The acquisition was partly financed by intercompany borrowings at an arm’s length interest rate. The tax authorities disallowed the interest expense on the basis that the loan was taken out for a unallowable purpose. Judgement of the Upper Tribunal The Court upheld the decision and dismissed JTI Acquisitions Company Ltd’s appeal. According to the Court, a main purpose of the arrangement was to secure a tax advantage for the UK members of the group. The fact that the loans were at arm’s length was relevant but not determinative ...

In 2009 the BlackRock Group acquired Barclays Global Investors for a total sum of $13,5bn. The price was paid in part by shares ($6.9bn) and in part by cash ($6.6bn). The cash payment was paid by BlackRock Holdco 5 LLC – a US Delaware Company tax resident in the UK – but funded by the parent company by issuing $4bn loan notes to the LLC. In the years following the acquisition Blackrock Holdco 5 LLC claimed tax deductions in the UK for interest payments on the intra-group loans. Following an audit in the UK the tax authorities disallowed the interest deductions. The tax authorities held that the transaction would not have happened between independent parties. They also found that the loans were entered into for an unallowable tax avoidance purpose. A UK taxpayer can be denied a deduction for interest where a loan has an unallowable purpose i.e, where a tax advantage is the company’s main purpose for entering into the loan relationship (section 441 of the Corporation Tax Act 2009). If there is such an unallowable purpose, the company may not bring into account for that period ….so much of any debit in respect of that relationship as is attributable to the unallowable purpose. An appeal was filed by the BlackRock Group. In November 2020 the First Tier Tribunal found that an independent lender acting at arm’s length would have made loans to LLC5 in the same amount and on the same terms as to interest as were actually made by LLC4 (the “Transfer Pricing Issue”). The FTT further found that the Loans had both a commercial purpose and a tax advantage purpose but that it would be just and reasonable to apportion all the debits to the commercial purpose and so they were fully deductible by LLC5 (the “Unallowable Purpose Issue”). An appeal was then filed with the Upper Tribunal by the tax authorities. Judgement of the Upper Tribunal The Upper Tribunal found that the First Tier Tribunal had erred in law and therefore allowed HMRC’s appeal on both the transfer pricing issue and the unallowable purpose issue. The First Tier Tribunal’s Decision was set aside and the tax authorities amendments to LLC5’s tax returns were confirmed. Transfer Pricing “The actual provision of the loans from LLC4 to LLC5 differed from any arm’s length provision in that the loans would not have been made as between independent enterprises. The actual provision conferred a potential advantage in relation to United Kingdom taxation. The profits and losses of LLC5, including the allowing of debits for the interest and other expenses payable on the Loans, are to be calculated for tax purposes as if the arm’s length provision had been made or imposed instead of the actual provision. In this case, no arm’s length loan for $4 billion would have been made in the form that LLC4 made to LLC5 and hence HMRC’s amendments to the relevant returns should be upheld and confirmed.” Unallowable Purpose “The FTT did not err in finding that LLC5 had both a commercial purpose and an unallowable tax advantage main purpose in entering into the Loans. However, it was wrong to decide that the just and reasonable apportionment was solely to the commercial purpose. But for the tax advantage purpose there would have been no commercial purpose to the Loans and all the relevant facts and circumstances lead inexorably to the conclusion that the loan relationship debits should be wholly attributed to the unallowable tax purpose and so disallowed.” ...

In 2009 the BlackRock Group acquired Barclays Global Investors for a total sum of $13,5bn . The price was paid in part by shares ($6.9bn) and in part by cash ($6.6bn). The cash payment was paid by BlackRock Holdco 5 LLC – a US Delaware Company tax resident in the UK – but funded by the parent company by issuing $4bn loan notes to the LLC. In the years following the acquisition Blackrock Holdco 5 LLC claimed tax deductions in the UK for interest payments on the intra-group loans. Following an audit in the UK the tax authorities disallowed the interest deductions. The tax authorities held that the transaction would not have happened between independent parties. They also found that the loans were entered into for an unallowable tax avoidance purpose. A UK taxpayer can be denied a deduction for interest where a loan has an unallowable purpose i.e, where a tax advantage is the company’s main purpose for entering into the loan relationship (section 441 of the Corporation Tax Act 2009). If there is such an unallowable purpose, the company may not bring into account for that period ….so much of any debit in respect of that relationship as is attributable to the unallowable purpose. The Court ruled in favor of BlackRock and allowed tax deduction for the full interest payments. According to the Court it was clear that the transaction would not have taken place in an arm’s length transaction between independent parties. However there was evidence to establish that there could have been a similar transaction in which an independent lender. Hence, the court concluded that BlackRock Holdco 5 LLC could have borrowed $4bn from an independent lender at similar terms and conditions. In regards to the issue of “unallowable purposes” the court found that securing a tax advantage was a consequence of the loan. However,  Blackrock LLC 5 also entered into the transactions with the commercial purpose of acquiring Barclays Global Investors. The Court considered that both reasons were “main purposes” and apportioned all of the debits (interest payments) to the commercial purpose ...

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 advantage”, 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 gains”. 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 ...