JTI Acquisitions Company (2011) Limited v The Commissioners for HMRC

Sections 441 and 442 of the Corporation Tax Act 2009 require a fact-sensitive enquiry into the main purposes for which a company is party to a loan relationship. The tribunal may consider all the surrounding circumstances, including why that company was selected within a group structure. The use of borrowed funds to acquire a commercial asset, and arm’s-length borrowing, are relevant but do not preclude an unallowable purpose or determine the issue. A company’s awareness of a tax deduction is not itself sufficient: securing a tax advantage must be a main purpose. Where the loan relationship has an unallowable purpose, just and reasonable attribution of debits remains relevant even if the tax-avoidance purpose is a main purpose.

The appellant, a UK company in the Joy Global group, borrowed $550 million from an intra-group lender and used the funds in a structure for acquiring a US company. It claimed loan-relationship debits for the interest and surrendered them by group relief. HMRC denied the deductions under sections 441 and 442 of the Corporation Tax Act 2009, contending that obtaining a UK tax advantage was a main purpose for the appellant being party to the loan.

The First-tier Tribunal held that the unallowable-purpose rules applied, denied all the debits and dismissed the appeals against the closure notices: JTI Acquisitions Company (2011) Limited v HMRC [2022] UKFTT 166 (TC). The Upper Tribunal considered whether the FTT had adopted the correct statutory approach, whether attribution was required, and whether its factual findings and treatment of the evidence disclosed errors of law.

1. Appeal dismissed. The FTT had correctly concluded on the facts that securing a UK tax advantage was a main purpose for which the appellant was party to the loan relationship.
2. Sections 441 and 442 require the tribunal to consider all the facts and circumstances relevant to the company’s purpose. That may include why the particular company was selected, rather than another group company, to enter into the borrowing. The enquiry remains directed to the appellant’s purpose; group purposes are relevant only insofar as they inform that purpose. The reference to related transactions in section 442(1)(b) is controlled by the definition in section 304.
3. There is no statutory exclusion for arm’s-length borrowing used to acquire commercial assets. Such facts may support a commercial purpose, but they do not prevent a tax-avoidance purpose from being a main purpose. Nor is the use made of the borrowing determinative. The tribunal must assess the whole factual context. Knowledge that interest is deductible, or an intention to claim relief, does not by itself establish the requisite purpose.
4. The FTT made a non-material error by treating “related transactions” as encompassing all transactions in the wider scheme. Its practical approach of considering all the circumstances was nevertheless correct. The FTT was also wrong to hold that attribution under section 441(3) was unnecessary merely because the appellant had not established that the tax-avoidance purpose was not a main purpose. Once section 441 applies, attribution remains relevant, including where other main or subsidiary purposes may coexist. The error was immaterial because the FTT had alternatively found that all the debits were attributable to the unallowable purpose.
5. The FTT’s assessment of the documentary and witness evidence was evaluative. A failure to challenge every aspect of witness evidence does not require a tribunal to accept it uncritically, although allegations of dishonesty require particular care. The hearing was fair, and the challenged findings were open to the FTT.

• Upper Tribunal (Tax and Chancery Chamber) dismissed the appeal against the FTT’s decision: JTI Acquisitions Company (2011) Limited v HMRC [2022] UKFTT 166 (TC).
• First-tier Tribunal (Tax Chamber) dismissed the appellant’s appeals against HMRC’s closure notices and denied the claimed loan-relationship debits.