UK and International Tax news
Court of Appeal Hears Unallowable Purpose Case
Tuesday 25th June 2024
The Court of Appeal has given its judgment in a case involving the disallowance of interest paid on intra group borrowing taken out to fund a share purchase.
In JTI Acquisitions Company (2011) Ltd v HMRC [2024] EWCA Civ 652, the appellant was a UK company and part of Joy Global, a multinational group headquartered in the US, 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.
The appellant appealed to the FTT which agreed with HMRC that the unallowable purpose rules applied and that all the loan relationship debits in respect of the interest paid should be denied.
On appeal to the UT, 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 i.e. 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 had 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, the appellant 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 contended that 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.
In its judgment, the Court of Appeal considered whether (i) there was an unallowable purpose, and (ii) was there a commercial purpose.
It referred to the recent case of Blackrock, and Kwik Fit and Fidex and held that the appellant’s purpose was “to play the part that had been devised for it so as to obtain [a tax] advantage”. That being so, the appellant had a main “tax avoidance purpose” Further, the CA agreed with the UT which did “not consider that any of the points of evidence raised by the appellant demonstrate the FTT made an error of law” in finding that the appellant was not a party to the loan relationship for a business or commercial reason. Given these findings, the appeal was dismssed.
If you would like more information on the above decision, please contact Keith Rushen on 0207 486 2378.
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