CFM38140 - Loan relationships: tax avoidance: unallowable purpose: a main tax avoidance purpose: the meaning of tax advantage
Source: gov.uk (2025-05-07)


CTA09/S442(5), S476(1)

Introduction

For the ‘unallowable purpose rule’ (at s441-442) to be engaged, there must be an ‘unallowable purpose’: that is, a purpose for which the company is party to the loan relationship (or enters into a ‘related transaction’, as defined for the purposes of the rule), which is not amongst the business or other commercial purposes of the company.

It is specifically provided that if there is a purpose of securing a tax advantage (a ‘tax avoidance purpose’), and if this is the main purpose, or one of the main purposes, for which the company is party to the loan relationship or related transaction (s442(3)-(5), CFM38130 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38130) to CFM38140 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38140)), then this is an unallowable purpose. This is referred to as a ‘main tax avoidance purpose’ in the following.

This section considers what a tax advantage is and whose tax advantage may be in point. See CFM38125 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38125) for further detail on whose purposes are relevant; and CFM38135 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38135) for further detail on determining purposes and main purposes.

Tax advantage

Further to s476(1), tax advantage takes its meaning from CTA10/S1139. It includes:

a relief from tax or increased relief from tax (s1139(2)(a))

a repayment of tax or increased repayment of tax (s1139(2)(b))

the avoidance or reduction of a charge to tax or an assessment to tax (s1139(2)(c))

the avoidance of a possible assessment to tax (s1139(2)(d))

where tax is Income Tax or Corporation Tax (CTA10/S1119).

It also includes the avoidance or reduction of a charge under various other UK provisions, for instance, in relation to the bank levy.

In particular, this definition means that tax advantage always refers to UK tax: non-UK tax benefits are not covered.

Application in other purpose or object cases

The leading authorities on the meaning of tax advantage in other purpose or object cases are Inland Revenue Commissioners v Trustees of the Sema Group Pension Scheme [2002] EWCA Civ 1857 (IRC v Sema) and Commissioners of Inland Revenue v Parker [1966] AC 141(IRC v Parker).

Application in unallowable purpose rule cases

There is nothing in the context of s441-442 that suggests a different conclusion from that reached in IRC v Sema and accordingly all that is required for there to be a tax advantage for the purposes of s1139(2)(a) is for the taxpayer to have improved its tax position as a result of a transaction, for instance by deductible loan relationship debits.

This analysis was confirmed in Oxford Instruments UK 2013 Ltd v HMRC [2019] UKFTT 0254 (TC) by the FTT. They noted, at paragraph 111:

…[even i]n a case where that net neutral or net positive tax position arises as a result of both the generation of income and the generation of deductions, the deductions are still reliefs from tax pursuant to which the amount of income giving rise to tax is reduced.

It was noted in BlackRock Holdco 5 LLC v HMRC [2024] EWCA Civ 330, paragraph 100, that it was common ground in that case that “the deduction of loan relationship debits in respect of interest pursuant to Part 5 CTA 2009 is a tax advantage”.

It will therefore usually be clear that there is at least one tax advantage present for the company. There may be multiple tax advantages for the company and/or any other person (see below).

It is important to note that for there to be a main tax avoidance purpose, it is not enough that a tax advantage, as defined, results from the transaction: it is necessary that there also is a purpose to secure that tax advantage, and that that purpose be a main purpose. This is discussed in more detail in CFM38135 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38135) and CFM38170 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38170).

It is also important to note that tax advantage is a term defined by the legislation. There is a different concept of net tax benefits, UK or global, which is used in this guidance in its general sense. The existence of net tax benefits, UK or global, may be highly relevant to determining whether or not there is a main purpose to secure the tax advantage(s) identified. This is discussed in more detail in CFM38170 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38170).

Whose tax advantage and how specific?

Tax advantage may be for another person

As set out above, the tax advantage may be for the company or any other person. There is no requirement that that person be connected to the company.

Accordingly, there may be a tax avoidance purpose where borrowing is taken out with a purpose of participating in a transaction or series of transactions designed to secure a tax advantage for another person, or where the borrowing later acquires such a purpose. The other person may be, for example, a group company, or the other person may not be connected with the company at all.

It is not necessary to identify a specific quantum of tax advantage or precise identities of persons

This issue was discussed in Kwik-Fit Group Ltd and other companies v Revenue and Customs Commissioners [2024] EWCA Civ 434 at paragraphs 93 to 97. There the Court of Appeal found that “there is no requirement to identify either a specific quantum of tax saving or the precise identities of the beneficiaries”, rejecting arguments based on the fact some of the debtor companies were loss-making, or on the fact that the possibility of some debits being group relieved had not been featured in arguments before the FTT. Having found that identifying the purpose of an action is a forward- looking exercise, as discussed in CFM38135 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38135), they went on to say at paragraph 95: “[i]t is perfectly obvious that the group sought and expected to make material tax savings”. They noted that ‘tax advantage’ at s442(5) CTA 2009 needs to be read in the context of the legislation of which it forms part including that the profits and losses from loan relationships are determined in accordance with GAAP; and that it may be unclear until after the accounting period end how deductible debits will be used (absorbed/ surrendered or carried forward) and what the group relief position is. On the facts of this case, the FTT finding “that the aim was to benefit the ‘whole group’” was “sufficient identification of persons for the purposes of s.442(5). The persons in question were the appellants and other members of the Kwik-Fit group” (paragraph 97).