CFM38125 - Loan relationships: tax avoidance: unallowable purpose: whose purpose?
Source: gov.uk (2025-05-07)


CTA09/S442

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.

This section considers whose purposes are relevant when applying the unallowable purpose rule.

The test is the company’s subjective purpose or purposes in being party to the loan relationship in question: see BlackRock Holdco 5 LLC v HMRC [2024] EWCA Civ 330 (BlackRock v HMRC, for more detail, see CFM38167 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38167)) at paragraph 106:

It was also not disputed that, in deciding whether a loan relationship has an unallowable purpose, what matters is the company’s subjective purpose or purposes in being a party to the loan relationship in question.

The following considers in more detail whose purposes are relevant to determining company’s subjective purpose or purposes in being party to the loan relationship in question.

It assumes a company incorporated in the UK or under a similar corporate law regime as regards the role of directors. Where it makes statements on the likely factual position, this is based on HMRC’s experience. In any given case, it will ultimately be a question of the specific facts in that case. This section focusses on what HMRC considers to be the most likely factual positions.

The question of whose purpose is relevant has been considered in detail in the Court of Appeal decisions in BlackRock v HMRC and in JTI Acquisitions Company (2011) Ltd v HMRC [2024] EWCA Civ 65 (JTI v HMRC) (see CFM38167 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38167) for more detail on each). BlackRock v HMRC and JTI v HMRC each involved arrangements in which, as part of a group’s commercially driven acquisition of a third- party target company, UK companies were debt and equity financed by their parents, respectively, to acquire preference shares in the special purpose vehicle acquiror of the target company (BlackRock v HMRC), or ordinary shares in the target company (JTI v HMRC).

Purposes of the directors of the company

Leaving aside the types of decisions for which shareholder involvement is required, when assessing the subjective purposes of the company in being party to a loan relationship, the relevant decision-makers will normally be the directors and therefore it is their purpose which must be determined. This is supported in case law generally, and in unallowable purpose rule cases in particular.

For instance, this was stated by the FTT in Oxford Instruments UK 2013 Ltd v HMRC [2019] UKFTT 0254 (TC) (Oxford Instruments v HMRC); and in BlackRock v HMRC the Court of Appeal at paragraph 108 stated that it was:

common ground that for a corporate entity such as [the borrowing company], which can only exist through human agents, it is necessary to consider the subjective purpose of the relevant decision makers. Unless they have been bypassed or are effectively acting on instruction, that will normally be the board of directors.

It is useful to consider how the purposes of others might affect the directors’ purposes.

Relevance of purposes of others to directors’ purposes

Group situations

A company within a group will often be involved, including being party to a loan relationship, in wider arrangements of the group, and in some circumstances may have been brought into existence as part of those wider arrangements. These wider arrangements, including the particular structure chosen, may be driven by the purposes of the group (‘group purposes’), that is, for example, the purposes of the directors of another group company (for instance, of the parent or group treasury company), or of other senior individuals within the group.

It is likely, as a matter of fact, that in many situations the directors of the company will have some knowledge of the group purposes for such wider arrangements, and at the least, it is likely, as a matter of fact, that the directors of the company will know the group purposes in relation to their company’s role (generally and in entering into the loan relationship) in the wider arrangements. The directors may be briefed on relevant group purposes explicitly in board papers or may have acquired such knowledge through other routes, for instance if they are a director of other companies taking part in the arrangements, or if they sit on the executive board for the group or have other senior roles. Such knowledge may be acquired before the company in question is incorporated.

It is likely, as a matter of fact, that in many situations the directors will take into account and are influenced by their knowledge of the group’s purposes for the wider arrangements, especially for the company’s role, in the directors’ own purposes for the company being party to the loan relationship.

Accordingly, in many situations, the group purposes are likely to be relevant in assessing the application of the unallowable purpose rule. Whether or not any such group purposes influence the directors of the company to such an extent that they become a main purpose of the directors will then need to be determined, and depends on all the relevant facts and circumstances, see CFM38135 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38135).

That is not the same as substituting for the statutory test a test of group purposes for the wider arrangements or, where applicable, for the company’s existence. For example, if from a group’s perspective a company entering into a loan relationship was brought into being to play a role in relation to a wider set of arrangements, it does not follow necessarily that the company’s purposes in being party to the loan relationship are the purposes for which it was created or of the wider arrangements. The relevance of group purposes to the decision-makers, normally the directors, in influencing their decisions will need to be assessed on the facts of each situation.

In terms of case law support for the view expressed above, there are cases concerning purpose tests other than the unallowable purpose rule which support the view that, in many situations, directors have regard to what a group as a whole is trying to achieve, whether or not this is explicitly addressed by the directors. For instance, in the context of whether expenditure was incurred wholly and exclusively for the purposes of the company’s trade, where there were common directors for a number of companies, in Garforth v Tankard Carpets [1980] 53 TC 342 Walton J said (at page 349) that he found it “extremely difficult for any directors of two associated companies … to be certain in whose best interests – or, rather, in whose exclusive interests – any step which they take is being taken” and that it would take a “superhuman effort of mind” to be able to distinguish the purposes of specific entities in a group of companies.

In terms of unallowable purpose rule cases, the relevance of the group context has been discussed extensively in the Court of Appeal BlackRock and JTI judgments, and the view taken in these decisions is consistent with, and supports, the view expressed above.

For instance, in BlackRock v HMRC, the Court of Appeal cited, at paragraph 131, the FTT’s finding that the board members were not attending “in a vacuum”, and that fact, repeated at paragraph 164, and the Court of Appeal’s view that “[i]t would be artificial to seek to divorce what occurred at the board meeting from its context” (paragraph 166), were part of the Court of Appeal’s analysis that the company became party to the loan relationships to secure a tax advantage – see paragraphs 162 to 166.

The position is summarised in JTI v HMRC at paragraph 51 (for full quote, see CFM38135 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38135)), in particular at sub-paragraphs 51(i) to (iii):

i) Even where a company entering into a loan relationship was brought into being to further a wider scheme, the company’s purposes in becoming a party to the relationship are not necessarily those for which it was created or those of the wider scheme;ii) On the other hand, the context, and in particular the purposes of the wider scheme which the company was intended to advance, may, depending on the facts, bear on the company’s purposes in entering into the loan relationship;iii) The company will have a ‘tax avoidance purpose’ within the meaning of section 442 of CTA 2009 if it is seeking to play its part in a scheme which, to the knowledge of the relevant decision-makers, was designed to secure a tax advantage;

There are specific considerations when directors are instructed to ignore their knowledge of tax advantages in the context of wider arrangements, elements of which have been planned to secure such tax advantages.

In general, we would expect any instruction to the directors to ignore their knowledge of such tax planning to have no effect in reducing the significance of that knowledge in determining purpose. However, it is also the case that directors may properly be advised to take account of the fact that tax advantages do not in fact benefit the company when assessing the consequences for the company in playing its part.

In BlackRock v HMRC the borrowing company surrendered the non-trading loan relationship deficits by way of group relief to other UK members of the BlackRock group, for no consideration, in accordance with the usual policy of the group. The Court of Appeal held at paragraph 154:

It is right that [the board members of the borrowing company] were advised to leave any UK tax advantage out of account in assessing the viability of the transaction for [the borrowing company], but that was for the entirely proper reason that the company would itself obtain no benefit from it.

Nevertheless, the Court of Appeal held at paragraph 166:

… the fact that [the borrowing company] had a main tax avoidance purpose is not inconsistent with board members properly putting the tax benefits out of their minds when deciding whether the transaction was in [the borrowing company’s] best interests on a standalone basis.

Non-group situations

Outside the group situation, there are circumstances in which others may play a substantial part in driving wider arrangements, in which a company is involved, and as part of which the company is party to a loan relationship. For instance, this might apply to some wider arrangements driven by shareholders in a family-owned company.

Again, the wider context is relevant in determining what the company’s purposes are. In these circumstances it will very often be the case, as a matter of fact, that in many situations the directors have knowledge of the purposes of those driving the wider arrangements, at least as regards the company’s role, and that they take account of and are influenced by those purposes in their decision making.

Specific situations

There are some cases where the directors are not the relevant decision-makers, even though the decision is of a type that directors would ordinarily be expected to make (not one where shareholder involvement is required). For example, the directors will not be the relevant decision-makers where the directors have ceded control to, or are acting as puppets for, shareholders or, exceptionally, advisers. In those cases, it will be necessary to assess the purposes of those to whom they have ceded control or for whom they are acting as puppets.

This approach is supported by the case law. In Oxford Instruments v HMRC, the FTT stated (at paragraphs 101 to 102) that the purposes for which the company is party to the loan relationship are not those of the directors in the rare cases where the directors have ceded de facto control of the company or are acting as mere puppets. Similarly, as cited above, in BlackRock v HMRC, the Court of Appeal stated that directors will not be the relevant decision-makers where “they have been bypassed or are effectively acting on instruction”.

There are limited other situations in which, while the directors remain the relevant decision- makers, they may have a purpose of securing certain objectives intended by others, even though (untypically, in HMRC’s experience) they do not have knowledge of those objectives. For instance, there may be wider arrangements driven by a group, in which the group intends that a company’s role in the arrangements, and specifically its role in being party to a loan relationship, should be to secure a tax advantage. The company’s directors may wish to go along with the arrangements, whatever their purpose, but may not know that the company’s role in the arrangements is intended to be to secure the tax advantage. In such circumstances, the company may well be a party to the loan relationship for the purpose of securing the tax advantage.

The Court of Appeal stated in JTI v HMRC at paragraph 51(iv):

(iv) If it can be said that the company wishes to go along with such a scheme whatever [italics in original] its purpose may be [that is, a scheme which, to the knowledge of the relevant decision-makers for the scheme, was designed to secure a tax advantage], it may well be that the company has an unallowable purpose regardless of whether it appreciates that the scheme was designed to secure a tax advantage. It may suffice that those promoting the scheme have that intention

This is a complex area and, if the situations covered in this subsection may be in point, this should form part of the discussions with Counter-Avoidance Technical Team (see CFM38200 (https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm38200)).