UK and International Tax news
Court of Appeal Decision In Unallowable Purpose Case
Tuesday 30th April 2024
The Court of Appeal has published its decision in a case involving loan relationship debits on intragroup loans which were used to finance the acquisition by the BlackRock Group, through a UK resident entity, of the US business of Barclays Global Investors.
In Blackrock Holdco 5 LLC v HMRC [UKFTT 443 (TC)], the taxpayer had appealed against closure notices issued by HMRC amending its company tax returns for the accounting periods ended 30 November 2010 to 31 December 2015. The amendments to the returns disallowed the deduction of loan relationship debits in respect of the interest payable on and other expenses relating to $4bn worth of loan notes issued by LLC5 to its parent company, BlackRock Holdco 4 LLC.
The appeal concerned the structure that BlackRock used to acquire BGI US and, specifically the deductibility for UK tax purposes of interest payable on the loans made to it by LLC4 in its corporation tax returns, if properly made, would give rise to losses (non-trading deficits on loan relationships) which could be surrendered to UK members of the BlackRock group to set against their own taxable profits.
HMRC challenged the claim to deduct on two grounds, being transfer pricing rules, and the unallowable purpose rule. Its position on the TP issue was that the loans would not have been made at all between parties acting at arm’s length, and relief should be denied on that basis. On the unallowable purpose issue HMRC maintained that relief should alternatively be denied because securing a tax advantage was the only purpose of the relevant loans.
On appeal in November 2020, the FTT decided that the interest was deductible. With regard to the unallowable purpose rule, the FTT decided that although there was a main purpose of securing of a tax advantage, there was also a commercial purpose. It further decided that none of the interest deductions should be attributed to the unallowable purpose on a just and reasonable apportionment, with the effect that they were deductible in full.
HMRC appealed to the UT which found for HMRC on both issues and confirmed HMRC’s amendments to the relevant tax returns that denied the deductions.
The UT had allowed HMRC’s appeal on the TP issue on the basis of an argument that was not raised in the FTT, namely that in determining whether an independent lender would be prepared to lend, the TP provisions do not permit the existence of third-party covenants to be hypothesised where those covenants are not present in the actual transaction.
The taxpayer appealed to the Court of Appeal [BlackRock Holdco 5 LLC v HMRC [2024 EWCA Civ 330] which issued its decision on 11 April 2024.
On the TP issue, the CA held that the critical starting point any comparison requires the “economically relevant characteristics of the situations being compared” either to be “sufficiently comparable”, or that “reasonably accurate adjustments” can be made to eliminate the effect of any material differences. In the real transaction, LLC4 had no need of any of the covenants considered by the experts because, quite independently of its ownership of LLC5, it had control of LLC6 and its subsidiaries, including BGI US. In summary, the CA concluded that deductions for interest on the loans were not restricted under the transfer pricing rules.
Whilst the CA concluded that the FTT had reached the correct decision in finding that LLC5 had a commercial main purpose for entering into the loans, it also had a tax main purpose. The CA considered that the use of a debt-funded UK resident entity in an otherwise wholly US-based and equity funded ownership chain, compounded the related lack of any commercial rationale for LLC5, which had no control over the BGI US group, indicated that LLC5 not only had no commercial rationale but had no real commercial function. In addition, the board accepted and adopted the structure that had been devised to achieve a tax advantage.
The CA held that tax deductions for the interest on the loans should be disallowed.
If you would like more detail on this decision, please contact Keith Rushen on 0207 486 2378.
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