Upper Tribunal dismisses JTI’s appeal on unallowable purpose

Upper Tribunal upholds FTT decision that intra-group borrowing to fund share acquisition had unallowable purpose

JTI loses Upper Tribunal purpose appeal

The Upper Tribunal has upheld the First-tier Tribunal’s decision that loan relationship debits claimed by JTI Acquisitions Company (2011) Limited (JTI) in respect of intra-group borrowing to fund a share acquisition had an unallowable purpose. The Upper Tribunal found that the real decision makers were at JTI’s parent company level and that a main purpose of the loan relationship was to secure a tax advantage for the UK members of the group. The Upper Tribunal held that it is necessary, in a group context, to ask why a particular entity (and / or jurisdiction) was chosen to be the borrower and that this is a question that must be answered having regard to all facts and circumstances, not simply what was in the minds of the directors of the solus entity.

JTI, a UK incorporated holding company and member of a US parented group, was used as an acquisition vehicle to acquire another US-headed group. The acquisition was part-funded by intra group borrowing of $550 million at an arm’s length interest rate.


JTI had received detailed external tax advice on the US and UK tax implications of the structure.

JTI sought to apply debits in respect of the loan interest and surrender the consequent losses to other group companies by way of group relief - reducing their UK corporation tax liabilities. HMRC argued that all of the loan relationship debits were disallowed under the ’unallowable purpose’ rules in s441/s442 of the Corporation Tax Act 2009 and that those debits were wholly attributed to the unallowable purpose.

JTI submitted that legislation requires the requisite purpose to be ascertained from the perspective of the borrowing entity (only) and that where a company borrows at arm’s length to make a commercial acquisition, no question of unallowable purpose can arise.

The Upper Tribunal, following other recent case law such as Oxford Instruments, Blackrock and Kwik Fit, found that the question of whether there is an unallowable purpose needs to be determined on a full consideration of all facts and circumstances. The use(s) to which funds are put or the arm’s length nature of the borrowings are relevant facts but are not determinative.

The Upper Tribunal in this case has arguably also broken new ground in justifying this conclusion on the basis that the statutory language which simply asks about the purposes ‘for which’ the company is party to the loan is not restricted to the purposes of the company itself. If the answer is that a particular company was chosen for a tax reason, this may be indicative of an unallowable purpose.

These are increasingly becoming widely accepted principles and supersede arguments once thought to be viable regarding the unallowable purpose rules such as the argument that purpose should be viewed solely from the perspective of the Directors of the borrowing entity.

Whenever there is a UK borrower in an acquisition structure it will therefore be necessary to carry out a clear and detailed assessment of the commercial and business reasons for the UK borrowing entity’s involvement, supported by contemporaneous documents.