In JTI Acquisition Company (2011) Limited v HMRC [2024] EWCA Civ 652, the Court of Appeal (CoA) agreed with the Upper Tribunal (UT) and the First Tier Tribunal (FTT) that while the appellant made a commercial acquisition using a group loan, the wider group strategy of securing a tax advantage meant the loan had an unallowable purpose.
- A company cannot claim a deduction for interest payable on a Loan relationship if the loan has an unallowable purpose.
- If only part of the loan was for an unallowable purpose, a deduction may be allowed for a just and reasonable proportion.
- A loan has an unallowable purpose if one of the reasons that the company is a party to the loan relationship is not for business or commercial motives.
- If tax avoidance is one of the main purposes of the loan relationship, there cannot be a business or commercial motive.
JTI Acquisition Company (2011) Limited (JTI) is a UK-incorporated company that was part of the Joy Global group.
- JTI acquired a target group. To finance the purchase, a nine-point plan was developed as part of a global tax planning project by Deloitte. The planning aimed to maximise tax savings through interest debits and non-taxable credits.
- In brief, the planning involved:
- A US subsidiary of the Joy Global Group borrowed funds from a third party and claimed a deduction for the interest paid.
- The US subsidiary lent the funds to JTI so it could acquire the target group. JTI paid interest on this loan and claimed a deduction (Non-Trading Loan Relationship debits), which were surrendered to other companies in the UK group via Group Relief.
- To avoid tax on the interest payments made by JTI, the US subsidiary assigned its rights to receive interest to another group company resident in the Cayman Islands.
- The result was that both the UK and US companies received a deduction, with no corresponding taxable credit arising (a 'double-dip').
- HMRC issued closure notices, denying relief for the UK Non-Trading Loan Relationship (NTLR) debits because the loans were deemed to serve an unallowable purpose.
- JTI appealed to the First Tier Tribunal (FTT), which rejected the appeal, ruling that the loans served an unallowable purpose as the main purpose was to obtain a tax advantage for the wider group.
- JTI then appealed to the Upper Tribunal (UT), which dismissed the appeal. The UT agreed with the FTT that although JTI made a commercial acquisition using a group loan, the broader group's aim to secure a UK deduction rendered the loan's purpose unallowable.
- JTI appealed to the Court of Appeal (CoA), arguing that both the FTT and UT wrongly focused on why JTI was chosen to acquire the target company, rather than the reason JTI entered the loan relationship. They claimed that the sole purpose of the loan from JTI’s perspective was to facilitate the acquisition of the target group.
The CoA found:
- The purposes of an entity's existence and its purposes in entering a transaction may differ.
- The wider context of JTI’s borrowing must be considered to determine if securing a tax advantage was a main purpose.
- A company will have a tax avoidance purpose if it participates in a scheme which, to the knowledge of the relevant decision-makers, was designed to secure a tax advantage.
- The decision-maker's belief that the loan benefited JTI for other reasons (i.e. to enable the acquisition of the target group) does not exclude the possibility of a tax advantage purpose.
- The FTT and UT were correct in not restricting themselves to looking simply at the loan relationship or what the directors said about their purposes in isolation but rather ascertaining the purpose for which the company was a party to the loan relationship with the benefit of facts from the wider context of the company’s borrowing.
- The focus should be on JTI's decision-makers intentions, not solely on the use of the borrowed money. The wider scheme's purposes are relevant only if they influence these intentions.
- JTI's board was aware that the loan was part of a scheme to secure a tax advantage.
- JTI's main purpose was to participate in the scheme to obtain a tax advantage. Consequently, the debits were wholly attributable to the unallowable purpose.
The CoA dismissed the appeal.
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?
Losses: Trading and other losses
When can a company offset its losses? What restrictions are there? How are loss claims made?
Groups
What qualifies as a group for tax? How do you form a group? Which definition of a group applies for different types of tax? What are the benefits of being in a group?
Withholding Tax
When is Withholding Tax (WHT) paid? What are the applicable rates? Are there any exemptions?
£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.
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.
External links
JTI Acquisition Company (2011) Ltd v HMRC [2024] EWCA Civ 652
JTI Acquisitions Company (2011) Limited v HMRC [2023] UKUT 194
JTI Acquisition Company (2011) Limited v HMRC [2022] TC08493
