UK and International Tax news
FTT Decision In Loan Relationship Case
Sunday 30th June 2019
The FTT has recently held that a loan relationship employed as the last step in a structure for refinancing a US sub group did have an unallowable purpose.
In Oxford Instruments UK 2013 Ltd v HMRC  UKFTT 254, the FTT found that the issue of a promissory note by a UK subsidiary to its US parent had an unallowable purpose, even though it was part of a group-wide refinancing and debt restructuring exercise which had clear commercial purposes.
As part of the refinancing of OI’s US sub-group in 2013, a ‘tower structure’ was utilized which involved a UK company being placed between two US companies and for interest to be paid by the company. The UK company would be treated as a hybrid entity, regarded as a company in the UK and as a branch in the US. This meant that interest was not taxable in the US recipient but was deductible in the UK.
OI claimed an interest deduction for the interest accrued on a £140m promissory note, issued in connection with a subscription for preference shares by the company. HMRC denied the deduction on the basis that the company’s main purpose in entering into the loan was to obtain a tax advantage and this was an ‘unallowable purpose’ within an anti-avoidance provision in the loan relationship tax legislation s. 441 CTA 2009.
OI challenged that there was an unallowable purpose and argued that the structure left the OI group ‘flat’ for UK tax purposes, with debits in the appellant company matched with credits in another UK group company.
The FTT found that the promissory note had been issued as part of the last of 8 steps of a single scheme. It noted that the US objectives of the scheme, being partly refinancing and partly simplification of the debt structure, would have been achieved if the scheme had step 8 not been implemented. Without step 8, the scheme would have given rise to net taxable income in the UK in an amount which was equal and opposite to the net deductible interest in the US. The sole purpose of the incorporation of OI in the UK, and its role in the scheme as a whole, was therefore to secure the UK deductions.
The FTT accepted that the purpose of the group as a whole was to achieve the US objectives but this did not alter the fact that the purpose of OI, in issuing the promissory note, was to secure the UK tax deduction.
Whilst the Judge has given leave to appeal, he also stated that ‘the Appellant can consider itself to be unfortunate in the way that things have turned out’.
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