In Kwik-Fit Group Ltd and others v HMRC [2024] EWCA Civ 434, the Court of Appeal has delivered its latest judgment dealing with the application of the loan-relationship unallowable purpose provisions (CTA 2009 ss 441 and 442).
The case involved arrangements whereby it was hoped that pre-2017 trapped non-trading loan relationship deficits carried forward (NTDs) in a group company (Speedy 1) could be used faster than the predicted 25 years. The arrangements involved generating interest income in Speedy 1 by the creation of new loans, the assignment of pre-existing intra-group loans, and the increase of the interest rate on the pre-existing loans. HMRC had disallowed the taxpayers’ claims to tax relief on the interest paid on the loans, on the basis that the loans had an unallowable purpose under s 441. The taxpayers’ appeals to the First-tier Tribunal (FTT) and Upper Tribunal (UT) had been dismissed.
Two key issues were considered by the Court of Appeal.
Firstly, regarding whether the taxpayers were party to the loans for an unallowable purpose, the taxpayers argued that the FT and the UT erred in holding the taxpayers had an unallowable purpose in becoming or remaining parties to the relevant loan relationships. They argued that the utilisation of NTDs in Speedy 1, although a purpose of the reorganisation, was not in itself a tax advantage. Further, although the taxpayer companies had been aware that paying interest (or increased interest) would result in deductible debits, this knowledge did not amount to a main purpose. However, the court rejected this attempt to draw a distinction between the utilisation of losses in Speedy 1 and the debits arising in the taxpayer companies. The arrangements had the economic effect of releasing the NTDs trapped in Speedy 1 for use by the group as a whole, and it was clear that the relevant decision makers understood this.
Additionally with regard to the unallowable purpose issue, the taxpayers argued that it was wrong to treat arm’s length interest paid in compliance with the (mandatory) transfer pricing rules as having an unallowable purpose. However, the court considered that what is relevant under the unallowable purpose rule is the taxpayers’ subjective purposes. It was clear to the court that the transfer pricing rules played no part in the decision making process in this case, except insofar as the group sought to ensure that the rate would not be challenged as being excessive. Therefore, the court considered that the context of the application of the transfer pricing rules do not preclude the unallowable purpose rule applying on these specific facts.
The second key issue concerned ‘just and reasonable’ apportionment of debits. The court noted that just and reasonable apportionment pursuant to s 441(3) is an objective exercise which requires apportionment by reference to the relevant purposes. The exercise is a fact-specific one. In this case, the court could see no legal error in the FTT’s approach to apportionment, the result being that tax deductions for the full amount of interest debits on ‘new’ loans, and the debits arising from an increase in interest rates on ‘pre-existing’ loans, should be disallowed. The taxpayers’ appeal was dismissed.
A case report of this decision will be included in next week’s edition.
In Kwik-Fit Group Ltd and others v HMRC [2024] EWCA Civ 434, the Court of Appeal has delivered its latest judgment dealing with the application of the loan-relationship unallowable purpose provisions (CTA 2009 ss 441 and 442).
The case involved arrangements whereby it was hoped that pre-2017 trapped non-trading loan relationship deficits carried forward (NTDs) in a group company (Speedy 1) could be used faster than the predicted 25 years. The arrangements involved generating interest income in Speedy 1 by the creation of new loans, the assignment of pre-existing intra-group loans, and the increase of the interest rate on the pre-existing loans. HMRC had disallowed the taxpayers’ claims to tax relief on the interest paid on the loans, on the basis that the loans had an unallowable purpose under s 441. The taxpayers’ appeals to the First-tier Tribunal (FTT) and Upper Tribunal (UT) had been dismissed.
Two key issues were considered by the Court of Appeal.
Firstly, regarding whether the taxpayers were party to the loans for an unallowable purpose, the taxpayers argued that the FT and the UT erred in holding the taxpayers had an unallowable purpose in becoming or remaining parties to the relevant loan relationships. They argued that the utilisation of NTDs in Speedy 1, although a purpose of the reorganisation, was not in itself a tax advantage. Further, although the taxpayer companies had been aware that paying interest (or increased interest) would result in deductible debits, this knowledge did not amount to a main purpose. However, the court rejected this attempt to draw a distinction between the utilisation of losses in Speedy 1 and the debits arising in the taxpayer companies. The arrangements had the economic effect of releasing the NTDs trapped in Speedy 1 for use by the group as a whole, and it was clear that the relevant decision makers understood this.
Additionally with regard to the unallowable purpose issue, the taxpayers argued that it was wrong to treat arm’s length interest paid in compliance with the (mandatory) transfer pricing rules as having an unallowable purpose. However, the court considered that what is relevant under the unallowable purpose rule is the taxpayers’ subjective purposes. It was clear to the court that the transfer pricing rules played no part in the decision making process in this case, except insofar as the group sought to ensure that the rate would not be challenged as being excessive. Therefore, the court considered that the context of the application of the transfer pricing rules do not preclude the unallowable purpose rule applying on these specific facts.
The second key issue concerned ‘just and reasonable’ apportionment of debits. The court noted that just and reasonable apportionment pursuant to s 441(3) is an objective exercise which requires apportionment by reference to the relevant purposes. The exercise is a fact-specific one. In this case, the court could see no legal error in the FTT’s approach to apportionment, the result being that tax deductions for the full amount of interest debits on ‘new’ loans, and the debits arising from an increase in interest rates on ‘pre-existing’ loans, should be disallowed. The taxpayers’ appeal was dismissed.
A case report of this decision will be included in next week’s edition.
