Loans and the unallowable purpose rule

18 September 2023 / Jake Landman , Abigail McGregor

Issue: 4905 / Categories: Comment & Analysis , CTA 2009 , loans , Tax planning , Investigations

Expansive approach

The Upper Tribunal (UT) has given further guidance on the proper interpretation of the UK’s rule that prevents deduction of interest for tax purposes where a loan is entered into for an ‘unallowable purpose’ in JTI Acquisitions Company (2011) Ltd v CRC [2023] STC 1459.

The unallowable purpose rule sits within the UK’s loan relationship regime (CTA 2009 s 441 and s 442). Under this targeted anti-avoidance rule a company may not bring into account any debits (being in the most part interest deductions) that are attributable to the unallowable purpose of the loan relationship. A loan relationship has an unallowable purpose if the purposes for which the company is a party to the relationship or enters into related transactions is not a business or other commercial purpose of the company.

The rule goes on to say that where a tax avoidance purpose is one of...

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