Kwik-Fit Group Ltd v Revenue and Customs Commissioners

The Court of Appeal dismissed the appellants' challenge to findings by the First-tier Tribunal and the Upper Tribunal that the appellants had an unallowable purpose under the loan relationships code (ss.441 and 442 Corporation Tax Act 2009) in participating in a 2013 intra-group reorganisation. The tribunals found that the reorganisation selectively increased interest on intra-group loans to Speedy 1 Limited, and that the directors of the appellants authorised those steps to generate deductible interest debits for the debtors while using Speedy 1's brought forward non-trading loan relationship deficits to shelter the corresponding income. The court held that the relevant subjective purposes of the directors included securing that tax advantage for the group and that it was open to the tribunals to attribute the debits to an unallowable purpose and to disallow the portion of interest debits attributable to that purpose (apportionment under s.441(3) CTA 2009). The court rejected arguments based on the transfer pricing code (Part 4 of TIOPA 2010), Kleinwort Benson and Sema as absolutes, and emphasised that the outcome depended on the particular facts and the tribunals’ findings of subjective purpose.

This appeal concerned a 2013 intra-group debt reorganisation within the Kwik-Fit group following its acquisition. Under the reorganisation receivables were concentrated in Speedy 1 Limited, which had substantial carried-forward non-trading loan relationship deficits, and interest rates on assigned and other intra-group loans were increased (to LIBOR + 5%). HMRC disallowed interest relief on those interest debits on the basis that the loans had an unallowable purpose under ss.441–442 Corporation Tax Act 2009. The appellants appealed to the First-tier Tribunal, which found an unallowable purpose and disallowed interest to the extent attributable to that purpose, but allowed interest at the pre-increase rate. The Upper Tribunal upheld the FTT. The appellants then appealed to the Court of Appeal.

Nature of the claim/application: an appeal against the tribunals’ application of the unallowable purpose rule in respect of loan relationship debits and related apportionment; the appellants sought to restore full deductibility of the interest debits. Procedural history: First-tier Tribunal decision ([2021] UKFTT 0283 (TC)); Upper Tribunal decision ([2022] UKUT 00314 (TCC)); Court of Appeal ([2024] EWCA Civ 434).

Issues framed by the Court: (1) whether the tribunals erred in finding that the appellants had an unallowable purpose in being party to the relevant loan relationships (including whether the accelerated utilisation of Speedy 1's losses constituted a "tax advantage" and whether the appellants' knowledge of, or expectation of, deductible debits amounted to purpose); (2) whether the tribunals erred in their just and reasonable apportionment under s.441(3) CTA 2009, and whether the transfer pricing rules (Part 4 TIOPA 2010) altered the analysis.

Court’s reasoning and conclusion: the Court accepted the tribunals’ detailed factual findings about the directors’ knowledge and motivations, including documentary material and witness evidence. It held that the decision-makers’ subjective purposes included creating deductible interest debits in circumstances where Speedy 1’s losses would shelter the corresponding income, thereby producing a real group tax benefit. That intertwined "group" purpose could be inferred from the evidence and was not unfair because relevant matters had been put in cross-examination. The Court rejected the submission that the use of Speedy 1's existing losses, taken alone, was not a tax advantage in the relevant sense: on the facts the description of the purpose as accelerating use of those losses was properly understood as shorthand for securing the group tax saving by generating deductions that would be effectively valuable. The transfer pricing rules did not change the subjective-purpose inquiry because the group had not treated those rules as driving the selective rate increases. On apportionment, the Court approved the tribunals’ approach, including capping disallowance at the amount of Speedy 1's non-trading deficits. The Court therefore dismissed the appeals.

Wider context: the court recorded that ordinarily the unallowable purpose rule will not be engaged by ordinary commercial loans on arm’s length terms; however, where a reorganisation is implemented selectively to produce tax advantages and the decision-makers’ subjective purposes reflect that, the rule may apply. The judgment cites and applies recent and earlier authorities including BlackRock Holdco 5, LLC v HMRC and addresses the interaction with the transfer pricing and loan relationships regimes.

Appeal dismissed. The Court of Appeal upheld the First-tier Tribunal and Upper Tribunal findings that the appellant companies, via their directors, had a main purpose of securing tax advantages for the group by creating deductible interest debits while using Speedy 1’s carried-forward non-trading loan relationship deficits to shelter the corresponding income; accordingly the tribunals were entitled to disallow the portion of interest debits attributable to that unallowable purpose and to apportion under s.441(3) CTA 2009. The transfer pricing code did not alter those conclusions given the factual finding that the group had not applied the transfer pricing rules as a motivating constraint.

First-tier Tribunal decision: [2021] UKFTT 0283 (TC) (FTT allowed the appeal in part, disallowing interest attributable to increased rate but permitting interest at pre-increase rate); Upper Tribunal decision: [2022] UKUT 00314 (TCC) (UT dismissed appeals and upheld FTT); Court of Appeal: [2024] EWCA Civ 434 (this judgment dismisses the appellants' appeal).