Connection, control and unallowable purposes

Clarifying connection and another aspect to the ‘unallowable purpose’ rule for loan relationships

Anti-avoidance applies despite no avoidance

The ‘unallowable purpose’ rule has attracted significant attention in recent years for its role in tackling perceived avoidance, but the First-tier Tribunal’s (FTT) recent decision in James Keighley & another v HMRC [2024] UKFTT 30 (TC) is a salutary reminder of the dangers of failing to consider the impact of ‘unallowable purpose’, even when there is no suggestion of tax avoidance. In a wide-ranging decision the Tribunal also had interesting things to say on the correct application of tests of ‘connection’ and ‘control’ used in various places across the tax code.


Two individuals together held the majority of the shares and voting power in two UK companies (Primeur and VDP), but with each individual in isolation having only a minority interest. The individuals had made unsecured loans to VDP, which had also received loan funding from Primeur, secured against a property.

On the sale of the property by VDP, Primeur agreed to release part of the secured loan due to it – enabling VDP to repay the individuals in full. It was accepted that this reflected the work undertaken by the individuals to bring about the sale of the property, which was in all parties’ interests, and there was no suggestion that the arrangement was tax motivated.

HMRC argued that Primeur should be denied relief for the write-off of the loan, either because the companies were connected or because the release had an ‘unallowable purpose’.

Connection and control

The companies would be connected if they were “both controlled by the same person”. Although no one person did in fact control both companies, HMRC argued (in line with their published guidance) that in light of the requirements of the Interpretation Act it was sufficient that the companies were controlled by the same persons.

The Tribunal agreed, rejecting the taxpayer’s argument that this would only be the case if the persons concerned (here the two individual shareholders) could be said to be acting ‘as one’.

As to whether the individuals did in fact control both companies, the relevant test of ‘control’ required an assessment of whether they could secure that the “affairs of the company” were conducted in accordance with their wishes. ‘Control’ for these purposes broadly means the power to secure the affairs of a company are conducted in accordance with a person’s wishes.

The Tribunal did not think this required an ability to control every detail of a company’s activity (e.g. its paperclip purchasing policy) but the existence of a shareholders’ agreement giving a minority shareholder an effective right of veto over various matters “fundamental to the running of the company at both an operational and strategic level” was enough to mean that on the particular facts the ‘control’ test was not satisfied.

Unallowable purpose

Although usually thought of as an anti-avoidance provision, the ‘unallowable purpose’ rule can be relevant in any scenario where a loan or related transaction has a purpose outside the relevant company’s business or other commercial purposes (with a tax avoidance purpose just being a special case of this).

The Tribunal accepted that it was proper for the individuals to be rewarded for securing the sale of the property (which benefitted everyone), but by giving up its entitlement to be repaid in full after the property had been sold Primeur was doing something which was not among Primeur’s business or other commercial purposes. Accordingly, the ‘unallowable purpose’ rule applied to deny relief in full.

Some observations

The Tribunal’s comments on how much control is needed for ‘control’ are potentially important given the (perhaps surprising) paucity of precedent in this area.

In practice, however, it is the treatment of an often-overlooked aspect of the ‘unallowable purpose’ rule that is likely to attract most attention here – especially given the Tribunal’s view that the failure to address this point in the contemporaneous advice obtained by the taxpayer was sufficiently careless to justify extending the window for HMRC to raise a discovery assessment. This highlights the need to properly consider the commercial impact of arrangements for the particular entities involved and not just any broader group.