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

A tax avoidance purpose under the loan relationships code depends on the company’s subjective purposes, assessed from all the evidence. A permitted tax result, commercial borrowing, an arm’s length interest rate, and the use of genuine carried-forward deficits do not by themselves exclude an unallowable purpose.

Where a group selectively increases intra-group interest solely to generate deductible expense while matching income is sheltered by trapped deficits, the intended group tax saving is a main tax avoidance purpose. The use of the deficits is the means by which the deductions acquire value; it is not a separate purpose that displaces that conclusion. A specific tax saving or identified beneficiary need not be proved.

The appellants were members of the Kwik-Fit group. In a 2013 intra-group debt reorganisation, receivables were assigned to Speedy 1 Ltd, new debts were created, and interest rates on relevant loans were increased to LIBOR plus 5%.

Speedy 1 had carried-forward non-trading loan relationship deficits. The arrangements generated interest income in Speedy 1, sheltered by those deficits, and interest debits for the appellant borrowers. HMRC disallowed the debits under the unallowable purpose rule.

The First-tier Tribunal partly allowed the taxpayers’ appeals. It permitted interest at the former rates on pre-existing loans. The Upper Tribunal dismissed both parties’ appeals: [2022] UKUT 00314 (TCC). The central issue was whether the appellants had a main tax avoidance purpose and, if so, the proper just and reasonable apportionment.

1. Appeal dismissed unanimously. The First-tier Tribunal was entitled to find that the appellants had a main unallowable purpose, and the Upper Tribunal correctly declined to interfere.

2. The relevant purpose was not merely the accelerated use of Speedy 1’s existing non-trading deficits. Used in isolation, those deficits did not improve Speedy 1’s position vis-à-vis HMRC because the reorganisation created the income against which they were set. The intended advantage was the group cash-tax saving created by deductible interest expense in the appellants while the matching income was sheltered in Speedy 1. In economic substance, the arrangements released trapped deficits for the benefit of the group.

3. The tribunal could infer that purpose from the directors’ knowledge, the contemporaneous documents and the transactions. It was unnecessary that a witness had expressly accepted a particular formulation of the purpose. The group’s purpose was to secure deductions for the borrowers or other group members without a corresponding tax charge on the income.

4. A pre-existing commercial purpose for the loans, an arm’s length rate, and statutory provision for loan-relationship relief did not preclude an unallowable purpose. On the particular findings, the appellants voluntarily accepted substantial additional interest without a non-tax reason. The rate was selectively imposed on debts due to Speedy 1 to maximise the tax saving, not because the transfer-pricing rules had motivated a general adjustment to arm’s length terms.

5. There was no requirement under section 442(5) of the Corporation Tax Act 2009 to identify a precise amount saved or every beneficiary. The intended benefit to the group was sufficient. The court endorsed the approach to “tax advantage” in [2002] EWCA Civ 1857, while holding that the use of Speedy 1’s deficits alone was not the relevant advantage.

6. Just and reasonable apportionment under section 441(3) was an objective and fact-specific exercise. All debits on the New Loans were attributable to the unallowable purpose because the borrowers had no commercial purpose for entering them. On the pre-existing loans, the additional interest alone was attributable to that purpose. The disallowance was properly capped once Speedy 1’s deficits were exhausted, because the tax advantage then ceased.

• Court of Appeal (Civil Division): dismissed the taxpayers’ appeal and upheld the Upper Tribunal’s decision: [2024] EWCA Civ 434.
• Upper Tribunal (Tax and Chancery Chamber): dismissed the appeals by both the taxpayers and HMRC, thereby upholding the First-tier Tribunal’s substantive conclusions: [2022] UKUT 00314 (TCC).
• First-tier Tribunal: found an unallowable purpose, but allowed the taxpayers’ appeal in part by permitting interest at the pre-reorganisation rates on pre-existing loans: [2021] UKFTT 0283 (TC).