UK Care No. 1 Limited v The Commissioners for HMRC

Section 327 of the Corporation Tax Act 2009 applies to an accounting loss arising in connection with a loan relationship even where the loss includes expenses falling within section 306A. The question whether a loss is referable to a pre-migration period is an objective assessment of commercial reality, undertaken with hindsight after crystallisation. Accounting treatment is relevant but not determinative. Issue costs and an issue discount may be referable to the post-migration period where they represent financing costs spread over the loan’s expected life. By contrast, a compensatory payment calculated by reference to pre-migration market movements may be referable to the pre-migration period, even though the payment is made after migration.

UK Care No. 1 Limited, a Guernsey company and issuer of secured loan notes, became UK resident in February 2016 before redeeming the notes early. It claimed a loan relationship debit of £150,749,046. HMRC disallowed £93,903,841 under section 327 of the Corporation Tax Act 2009 as an imported loss referable to the period before UK residence.

The First-tier Tribunal allowed relief for the penalty element of the redemption payment but held that the compensatory element, unamortised issue costs and unamortised discount were referable to the pre-migration period. The appeal concerned whether section 327 applied to expenses and how referability was to be assessed.

1. Ground 3. The expression “loss” in section 327 includes expenses incurred under or for the purposes of a loan relationship. Sections 306A and 327 address different matters: section 306A identifies matters in respect of which amounts are brought into account, whereas section 327 restricts amounts representing a loss. The statutory language, purpose and legislative history support that construction.
2. The unamortised issue costs and unamortised discount were expenses for section 306A purposes. They represented financing costs incurred in obtaining the loan and were properly spread over the expected life of the notes. The compensatory element was also, on balance, an expense associated with early redemption.
3. Grounds 1 and 2. Referability is an objective question of commercial reality, assessed with hindsight by reference to the particular loss once crystallised. It is not simply a causation test, although causation, including “but for” causation and the effective cause, may be relevant. Accounting treatment and fair value may assist the analysis but do not determine it.
4. The First-tier Tribunal erred in treating the time when the issue costs were incurred as determinative. Their commercial purpose was to obtain funding over the loan term, and their amortisation reflected commercial reality. The unamortised issue costs were therefore referable to the post-migration period.
5. The First-tier Tribunal also erred in relation to the unamortised discount. The discount was economically equivalent to interest and represented a cost of obtaining the loan. Changes in market conditions did not cause the obligation to pay it. The unamortised discount was therefore referable to the post-migration period.
6. The First-tier Tribunal was entitled to hold that the compensatory element was referable to the pre-migration period. It reflected the loss of future cashflows at rates exceeding current market rates, and the need for compensation arose from pre-migration market movements. The post-migration decision to redeem crystallised that pre-existing loss but did not create it.
7. The appeal was allowed in part. The relevant parts of the First-tier Tribunal’s decision were set aside and remade so that relief was allowed for the unamortised issue costs and discount. The appeal was dismissed as to the compensatory element.

• Upper Tribunal (Tax and Chancery Chamber): appeal from the First-tier Tribunal’s decision released on 13 June 2024. The appeal was allowed in part and the decision was partly set aside and remade.