Loan relationships: Look to wider group for unallowable purpose

In JTI  Acquisitions Company (2011) Limited v HMRC [2023] UKUT 194, the Upper Tribunal (UT) agreed with the First Tier Tribunal (FTT) that whilst the appellant made a commercial acquisition using a group loan, the wider group strategy of securing a UK deduction meant it had an unallowable purpose.

• 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. 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, resulting in:
  • A funding scheme for the acquisition, structured as part of a global tax planning project by Deloitte, that aimed at maximising tax savings through interest debits and non-taxable credits.
  • A nine-point plan set out the reasons for choosing the UK and the steps that needed to be completed in order to obtain the maximum tax advantage.
• 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 loan, loan notes and share capital. The loan was then assigned to a new group company incorporated in the Cayman Islands.
• JTI acquired the target group.
• The funding arrangement as a whole provided a US deduction on the third-party funding, a UK deduction on the UK interest payments, with no Withholding Tax on the payments to the Cayman Islands 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 rejected the appeal, agreeing with HMRC that the loans were for an unallowable purpose and given the lack of commerciality, the tax advantage gained by the wider group was the main purpose of the loans.
• JTI appealed to the UT on eight grounds. The key principle behind them all was that the FTT had erred by looking at the wider group when the question of purpose was one that was only relevant to the actual party to the loan. JTI had made a genuine commercial acquisition and so the loan should have been allowable.

The UT found that:

•  In terms of statutory interpretation of s.441 and s.442 CTA 09:
  • The tribunal is able to look at all of the facts and circumstances surrounding the main purpose of the loan. This can include not only the purpose of the loan but why the particular company was chosen to be party to the loan.
  • There is no part of the legislation that prevents the unallowable purpose rule from applying to arm's length financing used for a commercial acquisition.
  • The purpose of the borrowing is relevant but not necessarily determinative.
• As the FTT were able to consider all of the facts and circumstances, many of the grounds of appeal fell away.
• Choosing to fund acquisitions with debt because it gives rise to a deduction as opposed to using equity will not always fall foul of the unallowable purpose rules. The tax advantage has to be the main purpose, which is decided upon the specific facts of a case.
• The FTT were within their right to find no commercial basis for the loan based on the facts.
• The Deloitte nine-point plan and the supporting evidence, including board meeting minutes and group correspondence all pointed to securing the tax advantage as being the main reason for using the loans and inserting JTI into the structure as the acquiring company.

The appeal was 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? 

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  Acquisitions Company (2011) Limited v HMRC [2023] UKUT 194

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