JTI had received detailed external tax advice on the US and UK tax implications of the structure.

JTI sought to apply debits in respect of the loan interest and surrender the consequent losses to other group companies by way of group relief – reducing their UK corporation tax liabilities. HMRC argued that all of the loan relationship debits were disallowed under the ’unallowable purpose’ rules in s441/s442 of the Corporation Tax Act 2009 and that those debits were wholly attributed to the unallowable purpose.

JTI submitted that legislation requires the requisite purpose to be ascertained from the perspective of the borrowing entity (only) and that where a company borrows at arm’s length to make a commercial acquisition, no question of unallowable purpose can arise.

The Upper Tribunal, following other recent case law such as Oxford Instruments, Blackrock and Kwik Fit, found that the question of whether there is an unallowable purpose needs to be determined on a full consideration of all facts and circumstances. The use(s) to which funds are put or the arm’s length nature of the borrowings are relevant facts but are not determinative.

The Upper Tribunal in this case has arguably also broken new ground in justifying this conclusion on the basis that the statutory language which simply asks about the purposes ‘for which’ the company is party to the loan is not restricted to the purposes of the company itself. If the answer is that a particular company was chosen for a tax reason, this may be indicative of an unallowable purpose.

These are increasingly becoming widely accepted principles and supersede arguments once thought to be viable regarding the unallowable purpose rules such as the argument that purpose should be viewed solely from the perspective of the Directors of the borrowing entity.

Whenever there is a UK borrower in an acquisition structure it will therefore be necessary to carry out a clear and detailed assessment of the commercial and business reasons for the UK borrowing entity’s involvement, supported by contemporaneous documents.