Travel Document Service & Ladbroke Group International v Revenue & Customs (Rev 1)

The unallowable-purpose rule in paragraph 13 of Schedule 9 to the Finance Act 1996 applies to shares deemed to be loan relationships under section 91B. The relevant inquiry concerns the company’s subjective purposes for holding the shares during the period of the deemed relationship.

A tax-avoidance purpose is unallowable where it is a main purpose. Use of an asset, and the benefits intended from that use, may evidence a purpose for holding it. A purpose is “main” when it has sufficient importance; being merely more than trivial is insufficient.

Where a loan relationship has an unallowable purpose, debits attributable to it must be excluded on a just and reasonable apportionment. A company seeking attribution to an alternative commercial purpose must provide evidence capable of supporting that allocation.

Two companies in the Ladbrokes group participated in a scheme intended to generate corporation tax debits under the loan-relationship provisions of the Finance Act 1996. A total return swap caused shares held by Travel Document Service to be treated as a creditor relationship. Subsequent loan novations reduced their fair value and generated a claimed debit exceeding £253 million. Ladbroke Group International also claimed interest debits on the novated loans.

HM Revenue and Customs disallowed the debits. The First-tier Tribunal dismissed both companies’ appeals. The Upper Tribunal upheld that decision in [2017] UKUT 45 (TCC).

The Court of Appeal considered whether paragraph 13 of Schedule 9 applied to a deemed loan relationship, how the company’s relevant purposes should be identified, whether Travel Document Service had a main tax-avoidance purpose for holding its shares, and whether all Ladbroke Group International’s interest debits were justly and reasonably attributable to its admitted unallowable purpose.

1. Both appeals were dismissed unanimously. Paragraph 13 of Schedule 9 to the Finance Act 1996 applied to loan relationships deemed to exist under section 91B. Section 84(7) made Schedule 9 applicable to debits and credits brought into account for the purposes of the whole Chapter. Section 91B directed that the Chapter should have effect in relation to the deemed creditor relationship. Nothing in the statutory scheme excluded paragraph 13. Section 91B was also capable of applying where no unallowable purpose existed, so the interpretation did not invariably eliminate debits: per Newey LJ, with whom Bean LJ and Arden LJ agreed.

2. For a shareholding deemed to be a creditor relationship, paragraph 13 required examination of the purposes for which the investing company held the shares during the relevant period. The First-tier Tribunal’s preferred inquiry into the purposes for satisfying the conditions in section 91B(1) was mistaken. Its alternative finding, based on the purposes for holding the shares, was nevertheless sufficient.

3. The company’s subjective purposes governed. Its use of the shares and the benefits it hoped to obtain from holding them were relevant evidence. A continuing commercial reason for ownership did not prevent a tax-avoidance purpose from becoming an additional main purpose. The intended tax benefit exceeded £70 million and was substantial both absolutely and relative to the company’s apparent value. Since obtaining that benefit depended on continued ownership of the shares, the inescapable inference was that it became a main purpose for holding them during the scheme.

4. A “main” purpose under paragraph 13(4) connotes importance. It does not mean merely a purpose that is more than trivial.

5. The absence of direct cross-examination on the witness’s assertion that the shares were held only for commercial reasons did not preclude the finding. The tribunal did not need to disbelieve the witness; his assertion reflected an opinion about the legal meaning of “purpose”. Bean LJ added that the competing cases were evident throughout and the disputed statement was essentially argument or legal opinion. A direct challenge would have been preferable but its omission was not fatal.

6. Ladbroke Group International admitted that the novated loans had an unallowable purpose. It supplied no sufficiently particular evidence of alternative borrowing, its terms or its duration to support attributing any interest debit to another purpose. The First-tier Tribunal was therefore entitled to exclude all its debits on a just and reasonable apportionment.

1. Court of Appeal (Civil Division): By [2018] EWCA Civ 549, unanimously dismissed both appeals and affirmed the Upper Tribunal’s decision.

2. Upper Tribunal (Tax and Chancery Chamber): By [2017] UKUT 45 (TCC), upheld the First-tier Tribunal’s dismissal of both appeals.

3. First-tier Tribunal: Dismissed both companies’ appeals. It held that the deemed loan relationship had an unallowable purpose and that all claimed debits were excluded.