Interest deductions

Taxation of permanent establishments

The taxpayers were banks registered in Ireland but carrying on business through permanent establishments in the UK. They claimed interest expense deductions against their profits. They said these were incurred wholly and exclusively for the purposes of the trade of their UK branches between 2003 and 2007. HMRC refused the claims.

The issue before the First-tier Tribunal was whether TA 1988 s 11AA(3)(b) as inserted by FA 2003 s 149 for accounting periods beginning after 31 December 2002 precluded such deductions.

HMRC argued that s 11AA(3) required an assumption that a permanent establishment had a specific level of capital and that it disqualified deduction of interest and other costs that would not have been incurred if the assumed level of capital was held. The taxpayers said the attribution of a notional level of capital differing from the actual level employed in the...