The test continues to carry its earlier momentum by giving more guidance on the unallowable purpose rule.
Background:
JTI Acquisition Company (2011) Ltd (JTIAC) was a UK-resident company incorporated by Joy Global Inc (JGI), a US corporation group which manufactured mining machinery and equipment. JGI acquired LeTourneau Technologies Inc (LTT), a Texas corporation which manufactured machinery and equipment. On 13 May 2011, JGI entered into a stock purchase agreement by which it agreed to buy LTT for $1.1 billion.
JTIAC raised half of the purchase price through debt. JTIAC issued interest-bearing loan notes to a US member of its group and then sought tax relief on the loan interest of about £40 million. However, the HMRC refused the claim, as the loan relationship was mainly or only to secure a tax advantage which is an unallowable purpose under Section 441 Corporation Tax Act 2009. The First-tier Tax Tribunal (FTT) and Upper Tribunal (UT) dismissed the taxpayer's appeal.
Decision:
The Court of Appeal (CoA) dismissed the appeal against the disallowance for corporate tax purposes of debits in respect of interest payable on loan notes. The Court agreed with the FTT and the UT that the taxpayer was party to the loan notes for an unallowable tax avoidance purpose but not for any commercial purpose.
The CoA noted that it was clear that JTI was created with a view to securing a tax advantage and that the taxpayer's directors were aware of this. The taxpayer's purpose was to 'play the part that had been devised for it, so as to obtain a tax advantage'. Therefore, it primarily had an overarching tax avoidance purpose.
Regarding the commercial purpose, the Court saw no reason to interfere with the FTT’s conclusion that the taxpayer had no commercial purpose in issuing the loan notes. The Judge noted that, even if there had been a commercial purpose for the company being party to the loan relationship, the debit was attributable to an unallowable purpose based on Fidex v CRC [2016]. The Court clarified that in its understanding Fidex means that even if the company had another purpose the debit would still be wholly attributable to the unallowable purpose as “[b]ut for this tax avoidance scheme there would have been no debit at all.” Applying this conclusion to the facts, Lord Justice Newey concluded “but for the scheme to secure a tax advantage which was "bolted on" to the purchase of LTT, there would have been no loan relationship and so no debit.”
Implications:
This ruling adds to a now long line of recent case law such as the Kwik-fit or BlackRock from the CoA regarding the scope of the unallowable purpose rule. It offers guidance as to the consequences of its application. It highlights that substantial commercial acquisition was not sufficient, in itself, to preclude the application of the unallowable purpose rule.
The CoA also made clear that the ‘but for’ test is applicable for tax avoidance and the unallowable purpose rule. Companies will, therefore, need to show strong evidence that an inter-group loan was not established for the purpose of avoiding tax.