UK and International Tax news
UT Dismisses Appeal In Unallowable Purpose Case
Wednesday 6th September 2023
The Upper Tribunal has recently dismissed the taxpayer’s appeal in a case involving the disallowance of interest paid on intra group borrowing taken out to fund a share purchase.
In an appeal against the FTT’s decision in JTI Acquisitions Company (2011) Ltd v HMRC [2022] UKFTT 166 (TC), the appellant is a UK company and part of Joy Global, a multinational group which was headquartered in the US at the relevant time, and whose business was surface mining machinery.
In 2011 Joy Global Inc [JGI] acquired another US-headed equipment group for $1.1bn using the appellant, a newly incorporated company, as the acquisition vehicle. The acquisition was part funded by an intra-group $550m borrowing by the appellant on which it paid arm’s length interest to a Caymans based group finance company. The appellant sought to apply debits in respect of that loan interest in group relief surrenders but HMRC denied them on the basis of the “unallowable purpose” rules in s.441 and s.442 CTA 2009.
These rules apply when a company becomes a party to a loan relationship and where its main or one of its main purposes for being a party to the loan relationship is to secure a tax advantage for itself or another. Where the rules apply, the deduction of loan interest by the loan debtor is denied, but only insofar as it is attributable to the unallowable purpose on a just and reasonable basis.
The FTT agreed with HMRC that the unallowable purpose rules applied and that all of the loan relationship debits in respect of the interest paid should be denied.
The appellant raised eight grounds of appeal against the FTT decision largely involving the proper statutory approach to be taken when considering the purpose for which the appellant was a party to the loan. The appellant argued the legislation required the requisite purpose to be ascertained purely from the perspective of the borrowing entity. Where a company borrows at arm’s length to make a commercial acquisition, there should be no question of an unallowable purpose arising.
HMRC however considered the ascertainment of purpose required consideration of all the facts and circumstances including in a group structuring context why a particular entity (the taxpayer company) was chosen to be a party to the loan as opposed to another. HMRC contended that, as the FTT held, the appellant was inserted into the acquisition structure for the purpose of obtaining a UK tax deduction for the loan relationship debits.
Prior to the acquisition, Deloitte advised on the UK and US tax positions and put forward a proposal that envisaged a UK loan relationship debit on the borrowing costs of a loan without any matching taxable receipt in the US or Cayman. The appellant hoped and expected to receive loan relationship debits on the interest payable under loan notes which it could surrender by way of group relief.
The interest paid by the appellant was not subject to tax in the US or Cayman because of the US “check the box” rules. Nonetheless, JGI obtained a US tax deduction for the interest paid on its external $500 m borrowing but there was no taxable receipt for US purposes in relation to the financing of the appellant’s acquisition. It was common ground that any US tax advantages obtained from this structure were irrelevant for the purposes of s441/442.
The appellant argued that the FTT had failed to apply s.441and s.442 to the issue of the loan notes by the appellant and sought to ascertain the purpose of the whole group for entering into a whole series of transactions, which were not the target of the statutory provision.
The appellant went on to argue that the FTT had misapplied the concept of a “tax advantage” for the purposes of s.441 and s.442 with the result that the FTT was not properly focussed on any UK tax advantage to the exclusion of any US tax advantage.
In addition, the FTT had erred in its approach to determining whether the tax advantage was a “main” purpose of entering into the loan relationship, and had misunderstood the purpose of the loan relationship unallowable purpose rule and thereby gave it a scope which was contrary to Parliament’s intention.
The UT rejected these arguments and held that a tribunal should look at all the facts and circumstances in determining the main purpose for which the company is a party to the loan relationship. Consideration of purpose may include examining the reasons why that company, as opposed to another, was chosen to be a party to the loan relationship. That reason may inform the company’s purpose in being
The UT held that the FTT’s conclusion that the appellant was not a party to the loan relationship for a business or commercial reason was a finding of fact and was essentially an evaluative decision. The UT also held that it did not consider that any of the points of evidence raised by the appellant demonstrated the FTT made an error of law in so finding.
The appellant’s appeal was dismissed.
If you would like more information on the above decision, please contact Keith Rushen on 0207 486 2378.
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