£40m interest payable barred due to unallowable purpose

In JTI Acquisition Company (2011) Limited v HMRC [2022] TC08493, the First Tier Tribunal (FTT) found that the appellant was party to a loan relationship purely to gain a tax advantage. As such the loan had an unallowable purpose and the associated interest payments amounting to over £40 million were disallowed.

Under s.441 CTA 2009, a company may not claim a deduction for interest payable on a Loan relationship, where the loan relationship is for an unallowable purpose. If only part of the loan was for an unallowable purpose, then a deduction may be allowed for a just and reasonable proportion. There is an unallowable purpose where (s.442):

• One of the purposes for which the company is a party to the loan relationship is not one of the business or commercial purposes of the company.
• Where this purpose is tax avoidance, it cannot be a business or commercial purpose of the company if it is one of the main purposes for being party to the loan relationship.

JTI Acquisition Company (2011) Limited (JTI) is a UK incorporated company that was part of the Joy Global group, a mining machinery and equipment manufacturer when the disputed transactions took place. The ultimate parent was Joy Global Inc, a US company. 

• In 2011, there was a planned acquisition of a target group by Joy Global Inc. A funding scheme was implemented as part of a global tax planning idea aimed at maximising tax savings through interest debits and non-taxable credits:
  • After securing third-party borrowing for the acquisition, Joy Global injected equity and the borrowing to a US intermediary company that, in turn, incorporated JTI, injecting funds into JTI by way of a $500 million non-interest bearing loan, $550 million interest-bearing loan notes and $50 million share capital.
  • JTI acquired the target group.
  • The US intermediary incorporated another entity in the Cayman Islands as a finance company and the JTI interest-bearing loan was assigned to it. This allowed the loan to be outside of the Anti-Arbitrage rules (now the Hybrid and Other Mismatch rules as found in TIOPA 2010), which prevent a deduction where there is no matching taxable receipt. Choosing the Cayman Islands meant there was no UK Withholding Tax on the payments or Income Tax due on the receipts. 
  • The funding arrangement as a whole provided a US deduction on the third party funding, a UK deduction on the UK interest payments and no taxable receipts in the UK, US or Cayman Islands (otherwise known as a 'double-dip').
  • From the accounting period ended 31 October 2012 to the period ended 31 October 2015, JTI paid over £40 million of interest which was claimed as Non-Trading Loan Relationship (NTLR) debits. The debits were surrendered to other companies in the UK group via Group Relief.
• In May 2019, HMRC issued closure notices for all of the accounting periods in question, denying relief for the debits due to the loans being for an unallowable purpose. JTI appealed to the FTT.

The FTT dismissed the appeal finding that:

• The deduction of NTLR debits and subsequent group relief without any correlating taxable receipts meant that being a party to the loan relationship did secure a tax advantage for the appellant. The relief or increased relief from tax was secured for the other UK group companies.
• To find out whether securing a tax advantage was a purpose of becoming a party to the loan relationship, the judge considered why the $550 million loan notes had been issued. S.442 requires related transactions to be considered and so the reason for the funding arrangement needed to be looked at as a whole.
• The post-completion evidence, including emails and Board presentations, pointed to the sole purpose of the loan relationship as being one of obtaining a UK tax advantage. In an explanation to the target group's insurers, the Joy Global Group VP of Tax stated that both the UK and Cayman Islands entities had no employees and no assets and were "set up from a tax planning perspective".
• The loan relationship had no genuine commerciality, securing a tax advantage was the main purpose of becoming a party to the loan relationship, there was no part of the loan that had an allowable purpose, and so no apportionment was necessary.

UPDATE: This case has been appealed to the Upper Tribunal. The hearing is scheduled for 29 and 30 March 2023. 

Useful guides on this topic

Loan Relationships
How are loans made to and by a company taxed? What are the rules when loans are written down? What is the difference between a trading and non-trading loan relationship? What are the rules for connected party loans? 

Loan relationships toolkit: Is a balance within the rules?
When does a balance fall within the loan relationship rules?

Withholding Tax
When is Withholding Tax (WHT) paid? What are the applicable rates? Are there any exemptions?

External link

JTI Acquisition Company (2011) Limited v HMRC [2022] TC08493