Kwik-Fit Group Ltd and Others v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 November 2022 |
| Neutral Citation | [2022] UKUT 314 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2022] UKUT 314 (TCC)
Judge Swami Raghavan, Judge Rupert Jones
Upper Tribunal (Tax and Chancery Chamber)
Corporation Tax – Loan relationships – Unallowable purpose – Whether appellants had secured tax advantages – Whether appellants had purpose of securing such advantages – Whether FTT had properly apportioned debits between allowable and unallowable purpose – Held that tax advantages arose and appellants had purpose of securing tax advantages – Apportionment by FTT was correct – Appeal dismissed – CTA 2009, s. 441(3).
In Kwik-Fit Group Ltd & Ors v R & C Commrs [2022] BTC 536, the Upper Tribunal (UT) upheld the decisions of the First-tier Tribunal (FTT) in Kwik-Fit Group Ltd & Ors[2021] TC 08226. The FTT was correct to conclude a reorganisation of loans gave rise to tax advantages, the participants in the reorganisation had main purposes of securing such advantages and the FTT’s approach to attributing debits between allowable and unallowable purposes was correct.
The Kwik-Fit group had undertaken a reorganisation of inter-company loans resulting in one company in the group, Speed 1 Ltd (Speedy) increasing substantially credits from interest on loan relationships, whilst other group companies (the borrowers) had substantially increased loan relationship debits. Speedy was able to utilise brought forward non-trading loan relationship deficits (NTLRD) against the increased credits, and the borrowers were able to utilise the increased debits through group relief or otherwise. The NTLRD in Speedy were used up much more quickly than otherwise would have been the case giving a cashflow advantage to the group.
The FTT concluded that Speedy and the borrowers had obtained tax advantages; the loan reorganisation had been undertaken by each of them to obtain such advantages, they thus each had an unallowable purpose, and the debits attributable to such unallowable purpose were all ‘new’ debits created by the reorganisation, capped by reference to the Speedy NTLRD.
The appellants (who were the borrowers) argued that the FTT had erred in law and that neither Speedy nor the borrowers had obtained tax advantages. Moreover, even if they had, the appellants did not have a purpose of obtaining tax advantages. Both the appellants and HMRC disputed the attribution of debits made by the FTT. The appellants argued that it did not take account of their commercial purposes, whilst HMRC had argued that all debits arising post the reorganisation, not just the new debits, should be disallowed (up to the amount of the NTLRD).
The UT first dealt with whether Speedy had obtained a tax advantage. The appellants argued that, although the test for whether a tax advantage existed had been correctly identified by the FTT – being whether the taxpayer had used a relief and was in a better position vis-à-vis HMRC than would otherwise have been the case – the FTT had misapplied the test. Speedy had simply utilised pre-existing tax losses, and this was not using a relief. However, the UT agreed with HMRC that the relevant definition of tax advantage found in CTA 2010, s. 1139(2) was specific, and could include the offset of losses.
The use of the losses improved Speedy’s position vis-à-vis HMRC, and thus it had obtained a tax advantage. The fact that in the years in question it would have paid no tax with or without the effect of the reorganisation was not relevant.
Following similar logic, the obtaining of debits for interest deductions was also a tax advantage for the appellants.
However, the appellants further argued that the FTT did not have sufficient evidence available to it to conclude that the appellants had a purpose of seeking a tax advantage for themselves. In particular, at the FTT, witnesses for the appellants had not been questioned as to whether they had such a purpose. The UT considered that the FTT had had ample evidence before it. This was both documentary evidence and the fact that the witnesses had confirmed the appellants’ deductions were a key feature of the reorganisation. The appellants had accepted they had a purpose of enabling Speedy’s losses to be utilised (which they had argued was not a tax advantage). In the context of the scheme, it made no sense for the appellants to have this purpose if they did not also have a purpose of utilising the debits they were generating. The FTT had evidence to support its conclusion that the appellants had a purpose of seeking a tax advantage for themselves and the UT thus upheld the FTT’s conclusion that the appellants had a purpose of seeking a tax advantage.
The FTT had applied a test of asking what would the debits have been absent the transactions associated with the unallowable purpose, and on that basis concluded that all deductions arising on newly created loans in the reorganisation were attributable to the unallowable purpose and should be disallowed. Since the FTT decision, such an approach had been upheld by the UT in the case of R & C Commrs v BlackRock Holdco 5, LLC, and the UT had no reservation in upholding the FTT’s approach in the current case. The UT also found that it was open for the FTT to conclude that where one of the appellant borrowers had previously had an interest bearing loan from another group company, the commercial reasons for that loan could persist, notwithstanding the loan had been assigned as part of the reorganisation, and the amount of debits previously charged on the loan should stand; only additional debits on such loans should be attributed to an unallowable purpose.
The UT also agreed that the disallowances should be cappped at the amounts of the NTLRD; once that point had been reached, the unallowable purpose effectively fell away, as no further improvement vis-à-vis HMRC was being achieved
The UT also agreed with the FTT’s conclusion that the appellants could not use the transfer pricing provisions to argue the reorganisation did not give rise to tax advantages.
The taxpayer’s appeal was dismissed; HMRC’s appeal against the FTT’s attribution of debits was also dismissed.
In this case, both Speedy and the appellants were regarded as obtaining ‘tax advantages’, even though the amount of tax they would (or would not) actually pay in the years in question was generally unchanged before and after the reorganisation. The UT supported a wide interpretation of the term ‘tax advantage’. The UT also supported the FTT in looking at the facts in the round, and not narrowly focusing on what was happening in each company, which was what the appellants’ arguments largely relied on. This case is a reminder that the bar for ‘tax advantage’ is very low; notwithstanding the Exchequer Secretary’s famous comments on the original 1996 legislation that the unallowable purpose rule is not intended to prevent companies from getting tax relief for legitimate financing arrangements, there is no ‘safe harbour’ for loans taken out on arm’s length terms. In any intra-group financing situation, where the loan relationships improve the tax position of the group in any way, the commercial, non-tax, benefits of the financing must be able to be clearly articulated if the tax relief is to be preserved.
Comment by Glyn Fullelove, Senior Tax Writer, Croner-i Ltd
Julian Ghosh KC and Laura Ruxandu, Counsel, instructed by Baker & McKenzie LLP appeared for the appellant
Elizabeth Wilson KC and Ronan Magee, Counsel, instructed by the General Counsel and Solicitor to His Majesty's Revenue and Customs appeared for the respondents
[1] The appellant companies are members of the Kwik-Fit group of companies whose main business involves providing MOTs and car servicing. This appeal concerns the application of the unallowable purpose loan relationship regime to a restructuring of the group's intra-group debt. That regime, which is set out in Chapter 15, Part 5 of the Corporation Tax Act 2009 (“CTA 2009”), operates when a person becomes a party to a loan relationship and when one of their main purposes for being a party to the loan relationship is to secure a tax advantage for themselves or another. Where the regime applies, the deduction of loan interest by the loan debtor, that would otherwise arise, is denied, but only insofar as it is attributable to the unallowable purpose on a just and reasonable basis.
[2] The impetus for the group debt restructuring was the fact that an intermediate holding company in the Kwik-Fit group (Speedy 1 Limited, “Speedy”) had brought forward Non Trading Loan Relationship Deficits (“NTLRDs”) of £48 million. This amount could shelter interest receipts in the hands of Speedy from corporation tax but was regarded as “trapped” within Speedy because the corporation tax regime at the relevant time did not allow Speedy to surrender it by group relief to other companies to set against those other companies' taxable income or gains.
[3] Under the group debt restructuring, the interest rate was increased on an existing loan owed to Speedy, and on other loans which, as part of the restructuring, were assigned to Speedy. Speedy also entered into two new loans with group members at this increased rate. The result of increasing the rate of interest received, and the amount of debt owed to Speedy, meant its interest income was increased. That meant the company could use up the trapped losses more quickly (a period of 3 years as opposed to 25). The increased debt also meant the appellant companies, who were all debtors to Speedy on the loans in relation to which interest had been increased, had an increased deduction against which to set against their own profits or to group relieve.
[4] HMRC accepted the loans already in existence prior to the restructuring had been for a commercial purpose but considered the restructuring of debt engaged the unallowable purpose...
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