17 February 2023
The Upper Tribunal (UT) recently upheld the ruling in favour of HMRC handed down by the First-tier Tribunal (FTT) in Kwik-Fit Group and others v HMRC. The UT agreed that the restructuring of intra-group loans, to allow for an acceleration in the utilisation of brought forward tax losses that were otherwise ‘trapped’, was carried out for an unallowable purpose.
The unallowable purpose provisions are anti-avoidance rules which deny tax deductions that may otherwise arise in respect of a company’s loan relationships. A loan or related transaction is deemed to have an unallowable purpose if that purpose is, ‘not amongst the business or other commercial purposes of the company’, and this condition is met where the main purpose, or one of the main purposes of the loan or related transaction is to obtain a tax advantage for the company or any other person. Determining whether a loan relationship has an unallowable purpose requires a detailed assessment of the circumstances and the taxpayer’s subjective purposes in entering into it.
Case law precedent indicates the existence of an unallowable purpose should be assessed by, ‘consideration of all the relevant evidence… and the proper inferences to be drawn from that evidence.’ This is a principle that most would agree is reasonable, but the UT in Kwik-Fit has expanded on this by stating that it implies that, ‘questions regarding a person’s purpose are unlikely to be resolved by direct evidence or stated intentions alone.’ Furthermore, the UT also agreed with HMRC’s view (supported by case law precedent and unchallenged by the taxpayer) that it is appropriate, ‘to look beyond the stated motives and intentions of board members in determining a company’s subjective purposes.’ In other words, the UT decision supported HMRC’s argument that it was entitled to consider a range of factors and infer an unallowable purpose, based on the overall cumulative evidence.
The Kwik-Fit case
The case concerned a group refinancing which took place in 2013, whereby existing intra-group loans were restructured and new loan relationships introduced, such that the receivables were ultimately held by Speedy 1, a UK tax resident group company. Once this had taken place, the interest rates chargeable on the receivables held by Speedy 1 were increased to a market rate, but no corresponding market rate adjustments were made to the interest chargeable on Speedy 1’s payables.
Speedy 1 had approximately £48m of brought forward non-trading losses prior to the refinancing. These were considered to be effectively trapped, given the terms of the prevailing loss relief legislation, and management estimated that it would take Speedy 1 approximately 25 years to utilise them – a timeframe that, it was hoped, would be reduced to three years as a result of the refinancing.
The taxpayers argued that the refinancing did not result in a tax advantage, as Speedy 1 had no corporation tax liability prior to the transaction and was in the same position after the transaction, albeit that its losses would be utilised at a much faster rate.
However, the UT disagreed and found in favour of HMRC on this point and all other points under appeal by the taxpayers, concluding that the utilisation of Speedy 1's brought forward losses gave rise to a tax advantage, and that obtaining this tax advantage was a main purpose of the parties to the loans concerned. The unallowable purpose rules therefore applied.
In light of HMRC’s success, companies should ensure they continue to pay careful attention to the unallowable purpose provisions. It would be prudent to anticipate both an increasing focus on their application and a greater willingness for HMRC to take relevant cases to tribunal.
In addition, the latitude that can be applied in interpreting taxpayer intentions may, in some circumstances, make any challenge from HMRC under these provisions more difficult to resist than may have been the case historically. Formal documentation alone will not be sufficient to demonstrate the absence of an unallowable purpose, so it is important that taxpayers continue to undertake robust analysis of the impact of these provisions as part of the documentation process when restructuring or entering into new loan relationships, taking account of the basis of the UT’s ruling in Kwik-Fit and the outcome of other recent litigation involving intra-group loans in the cases of BlackRock and JTI Acquisition Company.
For more information, please get in touch with Suze McDonald or your usual RSM contact.