The Commissioners for HMRC v Blackrock Holdco 5, LLC

For transfer pricing purposes, the arm’s length comparison must remain sufficiently comparable with the actual transaction. A hypothetical lender’s third-party covenants cannot be introduced where they were absent from the actual transaction and materially alter its economic characteristics. If no comparable arm’s length provision would have been made, the actual provision is treated accordingly under Taxation (International and Other Provisions) Act 2010.

For unallowable-purpose rules, a company’s purposes are assessed subjectively, but apportionment of debits is an objective, just and reasonable exercise. Where the transaction and resulting debits would not have existed but for the tax advantage purpose, all debits may be attributed to that purpose.

BlackRock Holdco 5, LLC, a UK tax-resident company in the BlackRock Group, issued $4 billion of loan notes to its parent to fund an investment in a group subsidiary formed to acquire BGI US. HMRC disallowed the resulting loan relationship debits.

The First-tier Tribunal allowed the taxpayer’s appeal, finding that an independent lender would have made the loan if third-party covenants were provided, and that all debits could be attributed to a commercial purpose rather than the tax advantage purpose: [2020] UKFTT 443 (TC).

HMRC appealed on transfer pricing and unallowable-purpose grounds. The Upper Tribunal had to determine whether the hypothetical arm’s length transaction could include new third-party covenants and how the debits should be apportioned.

1. Transfer pricing. The relevant comparison under sections 147 and 151 of Taxation (International and Other Provisions) Act 2010 is between the actual provision and a sufficiently comparable arm’s length provision between the relevant two persons. The separate-entity approach requires the transaction and its economically relevant characteristics to remain comparable.
2. The FTT found that an independent lender would not have made the $4 billion loan on the actual terms, but would have done so only if covenants from other group companies secured the dividend flow and restricted other activities. Those covenants materially altered the surrounding circumstances, risks and economic characteristics. They could not be introduced into the hypothetical transaction when absent from the actual transaction. The FTT therefore erred in law: paras [48]-[76].
3. Third-party services which merely assist in determining an arm’s length price, such as legal or credit-rating services, may be relevant. Substantive third-party covenants affecting the substance of the lending transaction are different. Section 152(5) confirms that relevant guarantees are excluded from the hypothetical analysis: paras [60]-[75].
4. The FTT was entitled to find on the evidence that the Loans had both a commercial purpose and a tax advantage purpose. The test for purpose is subjective, but the FTT misapplied Mallalieu v Drummond and should have applied the approach explained in Travel Document Service & Ladbroke Group International v HMRC. That error did not invalidate its finding that securing a tax advantage was one of the main purposes: paras [161]-[182].
5. Apportionment under section 441(3) of Corporation Tax Act 2009 is objective and must be just and reasonable. The question is whether the debits would have existed but for the tax advantage purpose. Here, without the UK tax benefit there would have been no LLC5 and no Loans. All debits were therefore attributable to the unallowable purpose: paras [191]-[200].
6. HMRC’s appeal was allowed on both issues. The FTT’s decision was set aside and re-made. HMRC’s amendments to LLC5’s returns were confirmed: paras [201]-[202].

• Upper Tribunal (Tax and Chancery Chamber): allowed HMRC’s appeal, set aside and re-made the decision, and confirmed HMRC’s amendments: [2022] UKUT 199 (TCC).
• First-tier Tribunal (Tax Chamber): allowed LLC5’s appeal against HMRC’s amendments: [2020] UKFTT 443 (TC).