BlackRock HoldCo 5, LLC v Revenue and Customs Commissioners

This appeal concerned the deductibility for UK corporation tax of interest on $4 billion of intra-group loans used to finance BlackRock’s acquisition of BGI US. Two principal issues arose: (1) whether the transfer pricing rules in Part 4 of the Taxation (International and Other Provisions) Act 2010 required denial or adjustment of the interest because an arm’s length lender would not have made the loans absent third‑party covenants, and (2) whether the loans had an unallowable purpose under ss.441–442 of the Corporation Tax Act 2009 because securing a tax advantage was a main purpose.

Transfer pricing: the Court of Appeal held that the transfer pricing provisions and the OECD transfer pricing guidelines permit consideration of the position of third parties where that is relevant to making the economically relevant characteristics of the actual and hypothetical transactions comparable. The Upper Tribunal’s conclusion that third‑party covenants could not be hypothesised was an error. On the evidence the First‑tier Tribunal was entitled to find that an independent lender would have made the loans subject to covenants that would have put the lender in an equivalent economic position; accordingly deductions were not restricted on transfer pricing grounds.

Unallowable purpose: the court held that the subjective purposes of LLC5 in entering the loan relationship included a main purpose of securing a tax advantage for the group, although LLC5 also had a commercial main purpose. Applying s.441 CTA 2009 and the statutory apportionment requirement, the court concluded that, on the facts, 100% of the debits should be attributed to the tax‑advantage main purpose and the interest deductions were therefore disallowed under the unallowable purpose rule.

The appeal arose from LLC5’s claims to deduct interest on intra‑group Loans used to finance the acquisition of BGI US. At first instance the First‑tier Tribunal allowed the deductions. The Upper Tribunal allowed HMRC’s appeal and denied the deductions on two grounds: (a) transfer pricing under Part 4 TIOPA and (b) the unallowable purpose rule in ss.441–442 CTA 2009. The present appeal to the Court of Appeal followed.

Background and structure:

• BlackRock used a multi‑entity structure in Delaware (BFM, LLC4, LLC5, LLC6) such that LLC6 acquired BGI US; LLC5, UK tax resident, held preference shares in LLC6 and received expected preference dividends; LLC4 (a non‑UK member) issued loan notes to LLC5 totalling $4bn (the "Loans").
• For US tax purposes some LLCs were disregarded; LLC5 was UK resident and taxable. The claimed interest deductions for LLC5 would produce non‑trading deficits usable as group relief.

Procedural history: FTT ([2020] UKFTT 443 (TC)) allowed the deductions; UT ([2022] UKUT 199 (TCC)) reversed on both issues; the Court of Appeal reviewed both issues on appeal.

Issues decided by the court:

1. Transfer pricing (Part 4 TIOPA, ss.147, 151, 152 and s.164 interpretation with OECD guidelines): whether, for arm’s‑length comparison, it was permissible to hypothesise third‑party covenants not present in the actual intra‑group transaction.
2. Unallowable purpose (ss.441–442 CTA 2009): whether LLC5’s purposes in entering the Loans included a tax‑avoidance purpose that was a main purpose and, if so, how the debits were to be apportioned on a just and reasonable basis.

Court’s reasoning – transfer pricing: the court emphasised the OECD guidance that a comparability analysis requires alignment of the economically relevant characteristics; where material differences exist, reasonably accurate adjustments may be made. Hypothesising covenants that an arm’s length lender would have required was a permissible means of adjusting the hypothetical transaction so as to achieve comparability, and s.152(5) (the guarantee rule) demonstrates that third‑party support is relevant to the analysis. The FTT’s factual conclusions about the experts’ evidence (that an independent lender would lend subject to covenants and that those covenants could be obtained) were upheld. The appeal on transfer pricing was allowed.

Court’s reasoning – unallowable purpose: the court confirmed that the statutory test is subjective (the company’s purposes in being a party to the loan relationship) but that purposes are not limited to the conscious motives of the decision‑makers; authorities such as Mallalieu, MacKinlay, Vodafone and TDS were considered to extract principles on objective consequences and subjective purpose. On the facts (including the corporate structure, the board briefing and minutes, and the role assigned to LLC5) the court concluded that securing a tax advantage for the group was a main purpose of LLC5’s entry into the Loans, even though the board had also considered the transaction commercially viable on a standalone basis. Applying s.441(3), the court held that a just and reasonable apportionment attributable 100% to the tax‑advantage purpose was appropriate and remade the decision to disallow the interest deductions under the unallowable purpose rule.

Outcome: transfer pricing challenge dismissed (deductions not restricted under Part 4 TIOPA) but interest deductions disallowed under s.441/442 CTA 2009 because all debits were attributed to the tax‑advantage main purpose.

The appeal was allowed in part. On the transfer pricing issue the Court of Appeal allowed the appellant’s challenge: the transfer pricing provisions and OECD guidance permit hypothesising third‑party covenants where necessary to make the economically relevant characteristics of the actual and hypothetical transactions comparable, and the FTT was entitled to find that an arm’s‑length lender would have lent subject to such covenants. On the unallowable purpose issue the court concluded (on the facts) that LLC5 entered into the Loans with a main purpose of securing a tax advantage for the group (although it also had a commercial main purpose) and that, on a just and reasonable apportionment, 100% of the debits were attributable to the tax‑advantage purpose; the interest deductions were therefore disallowed under ss.441–442 CTA 2009.

FTT decision in favour of the taxpayer: [2020] UKFTT 443 (TC). Upper Tribunal allowed HMRC’s appeal and denied the deductions: [2022] UKUT 199 (TCC). Appeal to the Court of Appeal: [2024] EWCA Civ 330; the Court allowed the appeal on the transfer pricing issue and remade the decision on the unallowable purpose issue (concluding tax main purpose present and apportioning 100% of debits to that purpose).