Kwik-Fit Group Limited & Ors v The Commissioners for HMRC

Under the unallowable purpose regime, using brought-forward loan relationship deficits to shelter interest income is a tax advantage because it operates as relief from tax, even where the company’s ultimate tax liability is unchanged. A company may have a tax-avoidance purpose despite merely following provisions that permit the relief, and knowledge of a tax consequence is not by itself conclusive of purpose. Purpose is determined subjectively from all the evidence, including permissible inferences. Attribution under section 441 of the Corporation Tax Act 2009 requires an objective, fact-sensitive and just and reasonable apportionment. Existing commercial debits may remain allowable, while increased or newly created debits may be attributable wholly to the unallowable purpose.

The appellants were companies in the Kwik-Fit group. The group restructured intra-group debt so that Speedy 1 Limited could use substantial brought-forward non-trading loan relationship deficits more quickly. Interest rates were increased, existing loans were assigned to Speedy, and new loans were created.

HMRC denied interest debits under Chapter 15 of the Corporation Tax Act 2009. The First-tier Tribunal held that the relevant companies had an unallowable purpose and attributed all interest on the new loans, and the increased interest on existing loans, to that purpose. It allowed the original interest on certain assigned loans. The appellants appealed, and HMRC cross-appealed on attribution.

1. Appeals dismissed. The FTT’s decision was upheld.
2. The use by Speedy of its brought-forward non-trading loan relationship deficits to offset increased interest income was a relief from tax and therefore a tax advantage within section 1139(2) of the Corporation Tax Act 2010. The statutory definition did not require a comparison with a hypothetical transaction or proof that the company’s ultimate tax liability was reduced.
3. The FTT was entitled to find that the appellants had subjective purposes of securing tax advantages for Speedy and themselves. Knowledge of deductible debits did not itself establish purpose, but it was relevant evidence. The FTT could infer purpose from the documentary and oral evidence, the group’s objective of using the trapped losses, and the fact that the restructuring would not have proceeded if the relevant tax consequences had not been achieved.
4. The fact that the arrangements used provisions in the way contemplated by Parliament did not prevent them from having a tax-avoidance purpose. The linked advantages of using Speedy’s deficits and obtaining deductions for the debtor companies could be considered together when deciding whether a main purpose existed.
5. Section 441 required a just and reasonable apportionment based on an objective assessment of all relevant facts and circumstances. The statutory language was not to be glossed. A “but for” analysis might assist, but was not a separate legal test. The existence of more than one just and reasonable apportionment was possible, and the evaluation was susceptible to review on ordinary Edwards v Bairstow principles.
6. The FTT was entitled to attribute all debits on the new loans, and the increased interest on existing loans, to the unallowable purpose. It was also entitled to preserve the original commercial interest on assigned loans because the appellants would have remained parties to those commercial borrowings even without the restructuring. Transfer-pricing provisions did not require a different result, since no relevant claims had been made and transfer-pricing compliance was not shown to be part of the appellants’ subjective purposes.

1. Upper Tribunal (Tax and Chancery Chamber) — appeals against the FTT decision dismissed; FTT decision upheld, [2022] UKUT 314 (TCC).
2. First-tier Tribunal (Tax Chamber) — held that the relevant loans had an unallowable purpose; disallowed the new-loan debits and the increased interest on existing loans, but allowed the original interest on certain assigned loans, [2021] UKFTT 0283 (TC).