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

Under the unallowable-purpose rule in the Corporation Tax Act 2009, the relevant inquiry is the company’s subjective purpose in being party to the particular loan relationship. The wider transaction and group context may inform that purpose, but the tribunal must not simply substitute the group’s purpose or examine only how the borrowed money was used. A company may have a tax-avoidance purpose where it knowingly plays the part devised for it in a tax-driven scheme, even if its directors also consider the transaction beneficial for other reasons. A tax-efficient commercial transaction does not automatically trigger the rule. Where debits are wholly attributable to the unallowable purpose, no apportionment is required.

The appellant was incorporated as a United Kingdom subsidiary of Joy Technologies Inc. It issued $550 million loan notes to fund part of the acquisition of LeTourneau Technologies Inc. as part of a wider group structure. It claimed interest debits for corporation tax purposes.

The First-tier Tribunal found that securing a United Kingdom tax advantage was the appellant’s main purpose and disallowed the debits under sections 441 and 442 of the Corporation Tax Act 2009: [2022] UKFTT 166 (TC). The Upper Tribunal upheld that decision: [2023] UKUT 00194 (TCC). The appeal concerned the proper focus of the statutory purpose inquiry, whether the appellant had a commercial purpose, and whether the debits required apportionment.

1. Appeal dismissed. Lord Justice Newey gave the principal judgment, with Baker LJ agreeing and Lewison LJ also agreeing. The decisions of the First-tier Tribunal and Upper Tribunal were upheld.
2. The statutory inquiry under sections 441 and 442 of the Corporation Tax Act 2009 concerns the appellant company’s subjective purposes in being party to the particular loan relationship. The tribunal must focus on the intentions of the taxpayer’s relevant decision-makers. It may consider the wider scheme and the purposes of other group entities where those matters inform the taxpayer company’s own purposes. It must not adopt a tunnel-visioned approach confined to the proposed use of the borrowed money. This approach was consistent with BlackRock, Kwik-Fit, Travel Document Service and Brebner.
3. The appellant’s directors knew that the borrowing formed part of a tax-driven structure devised after the group was committed to the acquisition. The appellant’s purpose was to play the part devised for it so as to secure a tax advantage. The directors’ consideration of the company’s interests and any other possible commercial reasons did not prevent the existence of a tax-avoidance purpose. A genuine commercial acquisition carried out in a tax-efficient way does not necessarily involve an unallowable purpose; the conclusion depends on the facts.
4. The appellate tribunal was entitled to decline to interfere with the FTT’s finding that the appellant had no commercial purpose in issuing the loan notes. The limited circumstances in which appellate courts may interfere with factual or evaluative findings were illustrated by Edwards v Bairstow, Henderson v Foxworth Investments Ltd, R (R) v Chief Constable of Greater Manchester and In re Sprintroom Ltd.
5. Section 441(3) requires a just and reasonable apportionment by reference to the identified purposes. If a debit is wholly attributable to an unallowable purpose, no apportionment is required. Applying BlackRock and Fidex, the debits were wholly attributable to the tax-avoidance purpose: without the tax-driven scheme, there would have been no relevant loan relationship or debit.

• Court of Appeal (Civil Division) dismissed the appeal and upheld the Upper Tribunal’s decision: [2024] EWCA Civ 652.
• Upper Tribunal (Tax and Chancery Chamber) upheld the First-tier Tribunal’s decision: [2023] UKUT 00194 (TCC).
• First-tier Tribunal (Tax Chamber) found that the appellant’s interest debits were attributable to an unallowable purpose: [2022] UKFTT 166 (TC).