CFM38120 - Loan relationships: tax avoidance: unallowable purpose: is there an unallowable purpose?
Source: gov.uk (2025-05-07)


CTA09/S442

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.

The term ‘related transaction’ in the loan relationship regime generally is any disposal or acquisition (in whole or in part) of rights or liabilities under the relationship (see CFM31075 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm31075)). For the unallowable purpose rule, it is specifically provided that the reference to related transaction includes anything which equates in substance to a disposal or acquisition (s442(1A)).

The test must be considered for each accounting period during which the company is party to the loan relationship. Specifically, it is necessary to consider whether or not there is an unallowable purpose in each period and, if there is, what debits (or exchange gains credits) are attributable to it on a just and reasonable basis of apportionment.

An example of an unallowable purpose, that is, a purpose which is not amongst the business or other commercial purposes of a company, could be a purpose to promote a personal interest of one of the directors, and not that of the company. See, for instance, Example 16 in CFM38190 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38190).

It may or may not be within the commercial purposes of a company to pursue commercial objectives which are those of its shareholders in a group situation or those of its investors in a non-group situation.

In Keighley & Anor v Commissioners for His Majesty's Revenue and Customs [2024] UKFTT 30 (TC) (Keighley v HMRC), a company, Primeur, decided to write off part of a secured loan that should have been repaid in full, to a second company: the second company repaid unsecured loans from shareholders/ directors, including repaying in full unsecured loans from the two majority shareholders in common. The FTT held that Primeur’s decision to write off part of the loan (a related transaction) was for a purpose not within the business or other commercial purposes of the company. The FTT accepted, at paragraph 133, that the majority shareholders had done work “to secure a good deal for the sale of the property which resulted in a knock-on benefit for everyone”, and stated, at paragraph 134, that it seemed proper that “the majority shareholders should receive some sort of reward for that result”. But in this context on the facts of the case the FTT stated at paragraph 136:

But by depriving itself of capital by writing off a part of the secured loan to which it was entitled to repayment in full on the sale of the property by [the debtor company] …, it did something which was not amongst the business or other commercial purposes of the company. It deliberately deprived itself of working capital whilst benefiting the unsecured creditors who were also shareholders in the company.

Two types of purpose are specifically excluded from being amongst the business or other commercial purposes of the company. These are:

a purpose of securing a tax advantage (a ‘tax avoidance purpose’), where this is the main purpose, or one of the main purposes, referred to in the following as a ‘main tax avoidance purpose’ (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))
- a purpose of any part of the company’s activities in respect of which the company is not within the charge to Corporation Tax (s442(2), CFM38145 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38145))
For more detail on whose purposes are relevant, see CFM38125 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38125). For more detail on how to determine what the purposes and main purposes are, see CFM38135 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38135): whilst much of this section focusses on the main tax avoidance purpose limb of the unallowable purpose rule, the principles are applicable more widely.The purpose of a loan relationship may change over time: see CFM38135 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38135) for more detail. A loan relationship can have mixed purposes, that is, there can be one or more unallowable purposes and one or more purposes which are amongst the business or other commercial purposes of the company.