Kwik-Fit Group Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 11 August 2021 |
| Neutral Citation | [2021] UKFTT 283 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 283 (TC)
Judge Jeanette Zaman, John Woodman
Ms Nicola Shaw QC and Mr Michael Jones QC, counsel, instructed by Baker & McKenzie LLP, appeared for the appellants
Ms Elizabeth Wilson QC and Mr Ronan Magee, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – Loan relationships – Unallowable purpose – Intra-group reorganisation accelerated use of non-trading loan relationship deficits – Whether increase in interest paid by appellants was for unallowable purpose – Found that appellants purpose for reorganisation was to secure a tax advantage – Agreement to increased interest payments was a new purpose – New purpose was an unallowable purpose – Debits attributable to unallowable purpose on some loans different to amounts calculated by HMRC – Appeal allowed only to extent of adjusting some disallowances to correctly reflect debits attributable to unallowable purpose – CTA 2009, s. 441.
The First Tier Tribunal agreed with HMRC that an intra-group loan reorganisation had been undertaken with a view to obtaining tax one or more tax advantages for the group companies involved. Accordingly, loans in place after the reorganisation had an “unallowable purpose” within the meaning of CTA 2009, s. 441. The appeal was allowed in part, only to the extent that the FTT found that on certain loans the amount of debits attributable to an unallowable purpose on a just and reasonable basis was less than that calculated by HMRC.
Kwik-Fit is a well-known business, providing tyre replacement, MOT testing and other motor vehicle services. The business is carried on through the Kwik-Fit group of companies, founded in 1971. The group has undergone several changes of ownership since 1999. For the period between 2002 and 2011 it was owned by private equity owners, and the group became highly leveraged. In 2011, the group was acquired by Itochu Corporation, a Japanese multi-national enterprise. The acquisition was completed through a subsidiary of Itochu Corporation, European Tyre Enterprise Ltd (ETEL) which acquired the shares in Speedy 1 Ltd (S1), which owned all the trading subsidiaries of the Kwik-Fit group. ETEL already owned a similar business, Stapleton's Tyre Services Ltd.
The acquisition by ETEL of S1 resulted in S1 having to fully repay third-party borrowings. As a result, a significant amount of finance expenses was immediately debited to S1's accounts. Shortly after the acquisition, S1's accumulated non-trading loan relationship deficits amounted to £48m. It had little interest income, and the group estimated that it would take approximately 25 years for S1 to fully utilise these losses.
In 2013, a group loan reorganisation took place. This was a complex, multi-step arrangement. The key element from the point of view of the appeal was that after the reorganisation, S1 was in the receipt of several receivables which, in the main, had previously been owed to other group companies; and that these loan receivables now carried significantly higher rates of interest than prior to the reorganisation. Prior to the reorganisation some of the loans had been interest free, others carried interest at rates below 1% and the highest rate charged was 1.89%. After the reorganisation, the loans carried interest at LIBOR plus 5%. Some new loans had also come into existence, although these effectively replaced loans elsewhere in the group, so overall group indebtedness did not change. S1 was also in receipt of interest from these new loans, again at a rate of LIBOR plus 5%. S1 could now utilise its non-trading loan relationship deficits in two to three years.
HMRC enquired into the Appellants' returns for the periods ending on 31st March for each of 2014, 2015, and 2016. Following the enquiries, closure notices were issued on 14th November 2018 to the Appellants. These notices disallowed interest deducted by the Appellants on the loans they had which were due to S1, on the basis that the loans had been entered into for an unallowable purpose. The aggregate of the disallowances was capped at the amount of the non-trading loan relationship deficits of S1.
It was agreed by the parties that the loans which had been transferred to S1's ownership had originally been entered into for commercial purposes. The Appellants argued that these commercial purposes remained. Moreover, it was argued that neither the claiming of a debit for interest expense by the Appellants nor the utilisation of non-trading loan relationship deficits by S1 amounted to a tax advantage. HMRC's case was that both the claiming of the debits and the utilisation of the deficits were tax advantages, and that at least one of the main purposes of the Appellants being parties to the loans after the reorganisation was to secure these advantages.
The FTT took a three-step approach to the issue.
- Was a tax advantage gained by the Appellants or another person?
- Did the Appellants have a tax avoidance purpose for being parties to the loans, and was that tax avoidance purpose an unallowable purpose?
- If there was an unallowable purpose, what amount of debits should be attributed to said purpose?
The taxpayer's argument was that S1 did not obtain a tax advantage from the reorganisation; it already had the non-trading loan relationship deficits. A tax advantage would only have arisen to S1 if the receipts after the reorganisation had accrued in a way to S1 which was non-taxable when to another taxpayer they would have been taxable. The receipts accruing to S1 were taxable, they were simply sheltered by pre-existing deficits. The utilisation of deficits that had been incurred in a commercial and non-abusive manner was not an advantage.
By contrast, HMRC's position was that the ability to set a non-trading loan relationship deficit against a receipt was a “relief from tax”. “Tax Advantage” is defined in CTA 2010, s. 1139(2) and includes a “relief from tax”, and, so as a simple matter of statutory construction S1 had obtained a tax advantage.
Regarding the Appellants themselves, it was argued for the Appellants that they had not obtained a tax advantage; interest expense on borrowings for commercial purposes is not a tax advantage. It was suggested that the case of Oxford Instruments UK 2013 Ltd [2019] TC 07094 could be distinguished, as, in that case there had been no commercial purpose for the relevant borrowing. Moreover, the taxpayer contended that LIBOR plus 5% was an arms-length rate of interest for the post-reorganisation loans (the FTT accepted this was the case). A tax advantage could not arise from the charging of an arms-length rate; had an arms-length not been applied, S1 would have been a “tax-advantaged person” for the purposes of the transfer pricing provisions in TIOPA 2010, s. 147. Its profits would need to have been increased as a result and the Appellants could have claimed a corresponding deduction.
HMRC's position was that the obtaining of debits for interest expense was, of itself, a “tax advantage”.
The FTT examined the relevant case law and concluded that whether S1 had obtained a tax advantage did not require consideration of a “comparative” as put forward on behalf of the Appellants; this was a misunderstanding of the judgement in IR Commrs v Parker (1966) 43 TC 396. Moreover, the judgement in Sema Group Pension Scheme Trustees v IR Commrs [2003] BTC 106 made it clear that in determining whether a tax advantage arose what mattered was whether the taxpayer had improved its position vis-à-vis the tax authority.
The FTT considered that both S1 through the offset of non-trading deficits and the Appellants through obtaining the debits for interest expense had improved their positions vis-à-vis HMRC and both had obtained tax advantages.
Having established tax advantages arose, the next question addressed by the FTT was whether obtaining these tax advantages was the main purpose or one of the main purposes for entering into the loans; if so, the loans had an unallowable purpose.
The taxpayer argued that:
- In the case of the loans that the Appellants had had obligations under prior to the reorganisation, these had been entered into for commercial reasons that had not changed, notwithstanding the increase in interest charged to reflect an arms-length rate.
- In the case of newly created loans, these had simply replaced other commercial loans in the group restructure (ETEL had been removed from the group structure) and obtaining tax deductions/utilisation of the non-trading deficits of S1 was not the main purpose of the loans.
HMRC's case was that there was an admitted purpose of the reorganisation of accelerating the use of the non-trading loan relationship deficits, the reorganisation had been carried out in a specific way after external advice had been taken and the Appellants had agreed to increased interest payments, or in some cases, paying interest for the first time; there was a new purpose for all the loans under consideration arising from the reorganisation which was to use the non-trading deficits in S1 and this was the main purpose of the reorganisation.
The FTT followed the same process as in earlier cases involving the unallowable purpose rule by examining in detail the facts presented and seeking to ascertain from the evidence the purpose of the directors of each of the appellant companies. A key piece of evidence was a paper presented to those directors in advance of the transactions. This paper spelt out the tax implications of the reorganisation, including the use of the S1 deficits. Based on this paper and evidence presented by a director of all the appellant companies, the FTT concluded that the Appellants knew the full details of the reorganisation, they knew...
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