UK and International Tax news
FTT Finds For HMRC In Another Unallowable Purpose Case
Friday 13th December 2024
The FTT has dismissed the taxpayer’s appeal against closure notices in respect of corporation tax deductions for loan interest on the basis it was party to the loan for an unallowable purpose.
In Syngenta Holdings Ltd [2024 UKFTT 998 TC, SHL acquired the entire issued share capital of a sister company SL from its parent company, SABV. This reorganised the main UK subsidiaries of the corporate group headed at that time by SAG” [the Syngenta Group] so that they formed a single subgroup headed by SHL.
The total consideration of $2.2bn from SHL comprised a cash payment of $950m funded by way of a loan from Syngenta Treasury NV and the issue and allotment of 2,751 B ordinary shares of $1 each in the capital of SHL to SABV, having a total value of $1.258bn.
The loan was for a ten year term with the interest rate fixed annually on the basis of the 12 month USD LIBOR rate as at 31 December plus a margin of 2.87%.
An advance thin capitalisation agreement was entered into between SHL and HMRC in respect of the loan in February 2012. In the 2011 to 2016 accounting periods, SHL claimed the interest on the loan as deductible debits for corporation tax purposes.
HMRC opened enquiries into SHL’s tax returns for these accounting periods and in October 2019 sent closure notices to SHL having disallowed the deductions for interest on the basis that the main purpose of SHL being party to the loan was an unallowable purpose within s 442 CTA 2009.
SHL appealed against the amendments made by the closure notices on the grounds that it did not have an unallowable purpose or alternatively that if it did none of the debits are attributable to the unallowable purpose on a just and reasonable apportionment.
HMRC’s case was that the loan had an unallowable purpose because throughout the preparation for the transaction, those designing it understood the predominant reason was to obtain non-trading loan relationship debits under the loan relationship rules for the interest it paid at UK corporation tax rates (at the time 28%), which were to be surrendered to UK companies with taxable profits, being members of the same UK group, and those UK companies were to use the NTLR deficits to reduce their liability to tax.
HMRC maintained it was clear to those designing the transaction and to the directors of SHL that the predominant reason SHL was being offered SL was to obtain the tax advantage. It did not accept that the purpose of the transaction was either legal entity simplification or simplification of the dividend planning process.
HMRC’s case was that the whole of the debits claimed were on a just and reasonable apportionment attributable to the unallowable purpose.
After considering the evidence, the FTT held that the only object of the directors entering into the loan and the transaction was to secure the interest deduction. Reference was made to Falk LJ in the BlackRock case [see our Tax News item of 30 April 2024] who referred to it being a “straightforward” case, in which all the debits are properly attributable to a tax avoidance main purpose. The Tribunal Judge here considered there was only one main purpose and this was the unallowable purpose and was the only reason why the loan was entered into. It followed that all the debits must be disallowed under s 441 CTA 2009. The taxpayer’s appeal was dismissed, but right to apply for permission to appeal was granted.
This is yet another case on the unallowable purpose test within the loan relationships legislation. Even where there is a fairly common and straightforward intra group reorganisation involving debt, a detailed analysis of the commercial rationale for the related transactions should be carried out because if the main purpose is to secure a tax advantage, the courts may agree there is an unallowable purpose.
If you would like more information on the above, please contact Keith Rushen on 0207 486 2378.
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