Blackrock Holdco 5, LLC v The Commissioners for HM Revenue and Customs

Hearing dates: 5 and 6 March 2024

Approved Judgment

This judgment was handed down remotely at 10.00am on 11 April 2024 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

INTRODUCTION

In 2009 the BlackRock group acquired the worldwide business of Barclays Global Investors (“BGI”) for approximately US $13.5 bn, comprising $6.6 bn in cash and the balance in shares in BlackRock, Inc. (“BRI”), the group's parent company. The parties agreed that, out of the total consideration due, the amount that would be paid for BGI's US business (“BGI US”) would be $2,252,590,706 in cash and BRI shares worth $8.5 bn (the “BRI Shares”).

This appeal concerns the structure that BlackRock used to acquire BGI US, and specifically the deductibility for UK tax purposes of interest payable on $4 bn of intra-group loans put in place for that purpose. HMRC challenged the claim to deduct on two grounds, namely (1) the transfer pricing rules in Part 4 of the Taxation (International and Other Provisions) Act 2010 (“TIOPA”) (the “Transfer Pricing issue”), and (2) the unallowable purpose rule in s.441 of the Corporation Tax Act 2009 (“ CTA 2009”) (the “Unallowable Purpose issue”). In outline, HMRC's position on the Transfer Pricing issue is that the loans would not have been made at all between parties acting at arm's length, such that relief should be denied on that basis. On the Unallowable Purpose issue HMRC maintain that relief should alternatively be denied because securing a tax advantage was the only purpose of the relevant loans.

In a decision of Judge John Brooks dated 3 November 2020, the First-tier Tribunal (“FTT”) decided that the interest was deductible ( [2020] UKFTT 443 (TC)) (the “FTT Decision”). In a decision of Michael Green J and Judge Rupert Jones dated 19 July 2022, the Upper Tribunal (“UT”) allowed HMRC's appeal on both issues and confirmed HMRC's amendments to the relevant tax returns that denied the deductions ( [2022] UKUT 199 (TCC)) (the “UT Decision”).

The appeals relate to returns for accounting periods ended 30 November 2010 to 31 December 2015 inclusive.

The court is grateful for the assistance provided by the submissions of Kevin Prosser KC and David Yates KC for the appellant, BlackRock HoldCo 5, LLC (“LLC5”), and David Ewart KC and Sadiya Choudhury KC for HMRC.

The acquisition structure

The relevant acquisition structure is best viewed pictorially, and is included as an Appendix to this decision in a form reproduced from the UT Decision. BlackRock Financial Management, Inc. (“BFM”), shown as the parent company in the structure, was an existing Delaware corporation and an indirect wholly owned subsidiary of BRI. The acquisition structure involved the formation of three further entities which were incorporated in Delaware as limited liability companies (“LLCs”), namely BlackRock HoldCo 4, LLC (“LLC4”), LLC5 and BlackRock HoldCo 6, LLC (“LLC6”). In outline, BFM became the sole member of LLC4 and LLC4 became the sole member of LLC5. Both LLC4 and LLC5 became members of LLC6. It was LLC6 that acquired BGI US, by acquiring all of the outstanding shares in Delaware Holdings, Inc., the existing owner of BGI US, from the Barclays group.

The transaction consideration was passed down to LLC6 in the following manner:

a) BFM contributed $2,252,590,706 in cash and the BRI Shares to LLC4.

b) LLC4 contributed $2,144,788,229 in cash and the BRI Shares to LLC5 in return for 100 common (that is, ordinary) shares in LLC5 and the issue by LLC5 of loan notes in four tranches totalling $4 bn (the “Loans”).

c) LLC4 also contributed the balance of the cash, being $107,802,477, to LLC6 in return for the issue of 100,000 common shares in LLC6.

d) LLC5 contributed $2,144,788,229 in cash and the BRI Shares to LLC6 in return for the issue of 2,400,000 preference shares in LLC6.

The holders of the common shares in LLC6 were entitled to 216 votes for each common share. The holders of the preference shares in LLC6 were entitled to one vote for each preference share. The effect was that LLC4 held 90% of the voting power in LLC6.

Section 6.1 of the Limited Liability Company agreement of LLC6 stated that its board would determine in its sole and absolute discretion the amount of Available Assets (as defined) that were available for distribution and the amount, if any, of such Available Assets to be distributed to members in accordance with the following order of priority:

a) A total annual distribution of $300 per preference share (amounting to $720,000,000 on the basis of 2,400,000 shares).

b) A total annual distribution of $20 per common share (amounting to $2,000,000 on LLC4's 100,000 common shares), but no such distribution to be made unless and until all preference dividends for such period had been paid.

c) Any unpaid amounts of either preference or common dividends would be carried forward, with interest.

(Section 6.1 also gave the board of LLC6 the power, once these entitlements had been satisfied, to make additional distributions simultaneously to the holders of both classes of share, but on the basis that the amount distributed per preference share was four times the amount distributed per common share.)

The effect of this was that, as preference shareholder, LLC5 would be entitled to the vast majority of the distributions from LLC6, and to priority over distributions paid to LLC4. However, LLC4 controlled LLC6, and therefore could control whether it made any distributions.

Under US tax rules LLCs, unlike regular corporations, may elect to be disregarded for tax purposes. Each of LLC4, LLC5 and LLC6 made such an election. The effect of those elections included that transactions between those entities, including the Loans, fell to be ignored for US tax purposes.

In contrast to other entities in the structure, LLC5 was resident for tax purposes in the UK by virtue of being managed and controlled here. Unlike the position for US tax purposes it did not fall to be disregarded for UK tax purposes, and was treated as an entity subject to UK corporation tax.

The dispute concerns the claims by LLC5 to deduct interest on the Loans made to it by LLC4 in its corporation tax returns. If those claims were properly made they would give rise to losses (strictly, non-trading deficits on loan relationships) which could be surrendered to UK members of the BlackRock group to set against their own taxable profits. LLC5 sought to make such surrenders, and in accordance with the usual policy of the BlackRock group did so for no consideration. (LLC5 had no taxable income because its receipt of dividends on the preference shares was exempt from tax.)

Other relevant facts in outline

As a preliminary observation, the scope of the FTT's findings is not immediately obvious. Large parts of the FTT Decision appear at first sight to summarise evidence without explicitly confirming that the evidence was accepted. However, while additional clarity would have assisted, it is tolerably clear that where evidence is summarised without qualification it was accepted and found as a fact. In the case of the evidence of the two witnesses of fact, Nigel Fleming and J. Richard Kushel, this is supported by the FTT's finding at para. 5 that they were both “credible, truthful witnesses who at all times sought to assist the Tribunal”. Further, para. 9 expressly refers to making “the following additional findings of fact” to expand on those set out in a statement of agreed facts. The structure of the decision suggests that that comment covers the following sections up to para. 54.

I will deal with some of the factual findings in greater detail below, but it is convenient to refer to four points now. Cross-references are to paragraphs of the FTT Decision.

First, the FTT found that the split ownership structure of LLC6, with LLC4 rather than LLC5 having voting control of LLC6, was introduced because of concerns that the US financial regulator might have about a UK resident controlling a US bank, together with compliance-related concerns about the UK Treasury consent and UK controlled foreign company rules (para. 24). Those concerns had arisen in the context of an earlier proposal involving two rather than three LLCs, under which a UK tax resident LLC would itself acquire BGI US, and would be wholly owned by one further (non-UK resident) LLC owned by BFM (para. 21). It is not suggested that the UK related concerns themselves connote any tax avoidance purpose.

Secondly, having considered expert evidence adduced by both parties, the FTT found that an independent lender would not have been prepared to enter into the Loans on the same terms as the parties actually did, but that it would have done so if it had obtained certain covenants from, in particular, LLC6 and BGI US that were not there in the actual transaction (para. 103, reflecting an agreement of the experts recorded at para. 77 and a further finding at para. 89). The FTT also accepted the evidence of BlackRock's expert that such covenants would have been forthcoming (para. 102).

Thirdly, the board of LLC5 approved the proposal to take the steps relevant to that...