Use of losses can be a tax advantage

In Kwik-Fit Group Limited & Ors v HMRC [2022] UKUT 00314, the Upper Tribunal (UT) held that restructuring loans to utilise trapped Non-Trading Loan Relationship Deficits (NTLRDs) and obtain greater deductions for the debtors did count as securing a tax advantage, meaning the loans had an unallowable purpose.

• The Kwik-Fit Group (Kwik-Fit) had a number of existing intra-group loans, which originally were for commercial purposes.
• One of the group companies, Speedy 1, had a significant non-trading Loan relationship deficit (NTD) of £48 million. The company estimated it would take 25 years to utilise the Losses based on the level of loan receivables due to it.
• Following the acquisition of the group by the Itochu Corporation, a reorganisation of these receivables was undertaken. The aim was to make Speedy 1 the group treasury company and a number of group loans were assigned to it.
• All loans that Speedy 1 was a party to had the interest rate increased to LIBOR + 5%. This was a mix of loans newly assigned to Speedy 1 and existing loans with previously lower interest rates.
• HMRC disallowed the interest due to the loans being for an Unallowable purpose, which includes having tax avoidance as one of the main reasons for entering into the loan.
• Kwik-Fit appealed to the First Tier Tribunal (FTT).
• The FTT found that the main purpose for restructuring was to secure a tax advantage and the additional interest charged was to be disallowed due to the loans' unallowable purpose. The interest relating to any existing loans was to be allowed up to the amount charged pre-restructuring due to the existing commercial purpose. Interest on any new loans was to be disallowed in full.
• Both Kwik-Fit and HMRC appealed to the UT.
  • The appellants argued that using existing losses was not a relief and simply using these quicker could not be considered a tax advantage.
  • The appellants also argued that there was no evidence to show that it was their purpose to secure greater deductions.
  • HMRC appealed to the UT to have all interest (not just the increased interest post-restructuring) disallowed.

The UT found that:

• s.1139 CTA 2010 sets out the meaning of 'tax advantage' and reliefs from tax are specifically included.
• Relief is not restricted to situations where the level of tax charged or assessed is altered.
• In any transaction or series, there may be many tax advantages. The key is whether this is the main purpose of the transaction.
• Witnesses for the appellants gave evidence that the main purpose of the restructuring was group-level tax planning. This had the dual purpose of securing additional income to offset the NTLRDs against and to secure greater deductions for the debtors to the loans.
• The FTT were right to infer from the witnesses that the relief for the NTLRDs and the greater deductions were the main purpose of the restructuring.
• When considering the just and reasonable apportionment of the interest between commercial and unallowable purposes, the FTT was right to consider why the debtors were parties to the loans. The existing loans did have a commercial purpose and so only the increased interest was disallowed. The new loans were rightly disallowed in full.

The UT held that the FTT's decision was correct on all counts and both appeals were dismissed.

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?

Losses: Trading and other losses
When can a company offset its losses? What restrictions are there? How are loss claims made?

External link

Kwik-Fit Group Limited & Ors v HMRC [2022] UKUT 00314

Kwik-Fit Group Limited v HMRC [2021] TC08226