Broad approach to be taken to unallowable purpose rules

The taxpayer was a UK company and part of a multi-national group whose headquarters were in the US. It was set up to be a holding company into which it received funds including $500m in loan notes. It sought tax relief on the loan interest. The taxpayer highlighted that HMRC had entered into an advance thin capitalisation agreement (TIOPA 2010 218) which confirmed that the interest arising on the loan notes was allowable.

HMRC later said that the taxpayer was a party to a loan relationship whose main or one of its main purposes was to secure a tax advantage by surrendering debits by way of group relief. Therefore the unallowable purpose rules applied (CTA 2009 s 441) and HMRC denied relief.

The First-tier Tribunal agreed with HMRC and dismissed the taxpayer’s appeal.

The matter progressed to the Upper Tribunal. The main issue was the correct statutory...