Loans and the unallowable purpose rule

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...