UK and International Tax news

FTT Finds For Taxpayer In Unallowable Purpose Case

Monday 15th February 2021

The FTT has recently heard an appeal 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 LLV v HMRC [UKFTT 443 (TC)], the taxpayer 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 by LLC5 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 (“LLC4”).

The issues arising in the appeal included the following:

(1)          Was a main purpose of LLC5 being a party to the loan relationships with LLC4 to secure a tax advantage for LLC5 or any other person?

(2)          If securing a tax advantage was a main purpose of LLC5, what amount of any debit is attributable to such a purpose on a just and reasonable apportionment?

(3)          Whether the Loans between the LLC5 and LLC4 differ from those which would have been made between independent enterprises, in which case would the parties have entered into the loans on the same terms and in the same amounts if they had been independent enterprises and, if the answer is negative, would they, as independent enterprises, have entered into the loans at all, and if so, in what amounts, at what rates of interest, and on what other terms?

Issues (1) and (2) related to the unallowable purpose issue [per s.441 CTA 2009] and issue (3) to the transfer pricing issue [per s.147+ ITOPA 2010 and OECD 2010 Transfer Pricing Guidelines].

Re issues (1) and (2), the FTT held that it was common ground that the deduction of loan relationship debits in respect of the interest is a tax advantage. It is also common ground that it is the subjective purpose of LLC 5 that is to be considered in order to determine whether securing a tax advantage was the “main purpose” or “one of the main purposes” of its loan relationship with LLC 4.

The FTT found that whilst securing the tax advantage was considered to be a main purpose of LLC 5 in entering into the loans, the evidence also showed that LLC 5 entered into the loans in the furtherance of the commercial purpose of its business of making and managing passive investments and, as such, was to be regarded as a main purpose also.

Having come to the conclusion that there was a commercial and a tax purpose, it was necessary to consider a “just and reasonable apportionment”, as required by s 441 CTA 2009. However, the evidence of the taxpayer also indicated that LLC 5 would have entered into the loans with LLC 4 even if there had been no tax advantage in doing so. As the tax advantage purpose had not increased the debits, the FTT held that all of the relevant debits arising in respect of the loans should be apportioned to the commercial main purpose rather than the tax advantage main purpose.

Re issue (3), the FTT considered the expert evidence provided and held that although an independent enterprise would not have entered into the loans on the same terms as the actual transaction, it would, subject to certain covenants, have entered into the loans on the same terms as the parties in the actual transaction.

This decision is likely to be of significant interest to many structures employed in corporate acquisitions and the availability of relief for interest expenses. Given this and the amount of tax at stake in this case, an appeal by HMRC is thought likely.


If you would like more detail on this decision, please contact Keith Rushen on 0207 486 2378.

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