The Court of Appeal has confirmed that the loan relationship unallowable purpose rule in section 441 CTA 2009 applies to deny interest deductions arising to the Kwik-Fit group from a group reorganisation designed to accelerate the use of tax losses and produce a tax saving for the group as a whole.
In a swiftly issued decision, hot on the heels of its own BlackRock decision (discussed in more detail here), the Court of Appeal in Kwik-Fit Group Ltd and others v HMRC [2024] EWCA Civ 434 affirmed the decisions of the First-tier and Upper Tribunals. In the leading judgment, Falk LJ clarified that the tax advantage sought by the group (“the one that would make the group better off as against HMRC”, echoing Jonathan Parker LJ’s comments in Sema) was the net deduction generated by creating additional interest expense in circumstances where the corresponding interest income would be offset by existing “trapped” tax losses in the group.
Falk LJ found it “obvious” that the decision-makers (and both tribunals) understood that this was the real benefit of the reorganisation, even though this was not how the case had been argued by HMRC. Given the “obvious inference” from the contemporaneous evidence and findings of fact, there was no unfairness in the Upper Tribunal reaching its conclusion based on the “group tax benefit”, and it was not necessary for HMRC’s counsel to have put this point to the witnesses in cross-examination. Nor was it necessary for the quantum or the beneficiary of the tax saving to have been determined because identifying purpose requires a consideration of subjective intentions: that is necessarily a forward-looking exercise, and it was “perfectly obvious” on the facts of this case that the group sought and expected to make material tax savings.
All that being said, it is clear that purposes should not be inferred too easily. Falk LJ reiterated the summary of key points relevant to ascertaining purpose from BlackRock – including that, save in “obvious” cases, ascertaining the object or purpose of something involves an inquiry into the subjective intentions of the relevant actor. In doing so, the Court of Appeal appeared to acknowledge that not every case will be as obvious as this one. Indeed, Falk LJ also made a point of reiterating her previous comments made in BlackRock that “it cannot have been Parliament’s intention that the unallowable purpose rule will be engaged as an inevitable consequence of taking out (or, I would add, maintaining) a loan, or indeed charging interest on it at a commercial rate, subject only to consideration of whether the value of the tax benefits are sufficient to make it a ‘main’ purpose. The mere fact that a group organises its affairs in a manner that makes use of brought forward non-trading deficits and that it expects to obtain relief for interest and other expenses of loan relationships, in each case as the legislation contemplates, cannot be enough to engage the unallowable purpose rule”. As she put it in BlackRock: something more is needed.
With the Court of Appeal finding that they “ring somewhat hollow”, submissions for the taxpayer based on the requirements of the transfer pricing rules were also swiftly dispatched: this was not a case where the group had reviewed its transfer pricing position and decided to adjust interest rates generally to ensure compliance. Indeed, the taxpayer’s counsel “frankly acknowledged” that the transfer pricing rules did not motivate the decision to increase the interest rate on the intra-group loans here. It is implicit from this decision that Falk LJ preferred a real-world view which reflected how decisions were actually taken by the decision-makers in question.
Having found a tax main purpose, the Court of Appeal then considered the issue of just and reasonable apportionment. Here, the decision is disappointingly light, and largely just affirms the points made previously in BlackRock (specifically that a just and reasonable apportionment is a fact specific, objective exercise where a “but for” test may be helpful). One noteworthy point, though, is that Falk LJ considered HMRC were correct to accept that once the trapped losses were used up, it would no longer be just and reasonable to deny relief for the loan relationship debits. To her mind, this appropriately reflected the nature of the tax advantage sought to be secured. That was a point which drew attention in the earlier decisions, and so it is helpful to have the rationale set out and judicially approved.
The overall result is an unsurprising affirmation of the earlier decisions but one that nonetheless provides further clarity and guidance on how to assess tax advantages and untangle group purposes from individual company purposes. JTI is the next taxpayer appeal coming up to the Court of Appeal, later this month. It has also lost at both the First-tier and Upper Tribunal (discussed in more detail here) – it will be interesting to see if it is as swiftly dispatched by the Court of Appeal.
If you would like to discuss any of the points raised in this blog post in further detail, please contact the authors, our tax investigations and disputes team or your usual Freshfields contact. For our previous commentary on ‘unallowable purposes’ enquiries, see here and here.
