Supreme Court declines to opine on unallowable purpose
Does the Supreme Court’s refusal to hear appeals mean the end of unallowable purpose disputes?
Does Supreme Court’s refusal to hear appeals mean the end of unallowable purpose disputes?
The ongoing uncertainty over the correct interpretation of the ‘unallowable purpose’ rule, which can deny relief for interest on loans with an ‘unallowable purpose’, has become familiar refrain in advisers’ reports over recent years. Even the significantly expanded guidance in this area published by HMRC last year was appropriately caveated to take account of ongoing litigation.
The Court of Appeal had its opportunity to address several of the key issues, and to try and clear up some points of confusion on purpose tests more generally, with the release earlier this year of three decisions in quick succession:
- BlackRock HoldCo 5 LLC v HMRC [2024] EWCA Civ 330
- Kwik-Fit Group Ltd v HMRC [2024] EWCA Civ 434
- JTI Acquisition Company (2011) Ltd v HMRC [2024] EWCA Civ 652
Unsurprisingly, the helpful explanations of the key principles given by the Court in these decisions have been followed in other cases in the months since their publication.
Discussion of the significance of these cases has, however, inevitably turned to speculation over whether there would be any further appeals in these cases – speculation which has now been ended by the Supreme Court’s confirmation that it has refused permission to appeal on all three, on the basis that in each case the grounds put forward for a further appeal did not raise an arguable point of law.
That means that on the issues addressed by the cases – which particularly focused on the identification of subjective purposes and the relationship between group and entity purposes – the positions set out by the Court of Appeal are (at least for the foreseeable future) final. This is therefore a potentially significant moment for companies preparing to file 2023 returns, drawing up 2024 accounts, or with ongoing enquiries, as in each case it will now be necessary to properly assess the positions taken to ensure that they are consistent with the far-reaching views expressed by the Court of Appeal. It seems likely that the New Year will bring some focus from both HMRC and statutory auditors on whether this has been done.
All that does not mean that there are no areas of difficulty left, or that we’ve seen the end of unallowable purpose disputes.
A key theme of the decided cases is the fact-specific nature of questions of purpose. For all that the legal principles to be applied may now be clearer, the need to carefully weigh the evidence and the potential to reach different answers in superficially similar scenarios remains. As if to illustrate this point, whilst this article was being finalised, the First-tier Tribunal published its decision in another unallowable purpose case, Syngenta Holdings Ltd v HMRC [2024] UKFTT 998 (TC). The decision – which runs to 69 pages – largely relies on the explanations given by the Court of Appeal for the relevant principles, with the focus of the dispute being how these should be applied in light of the evidence in the case.
Linked to this, it should be noted that the case law to date has primarily been focused on the question of whether a particular ‘purpose’ exists, without much analysis of when that purpose constitutes a ‘main’ purpose – a question which may become more prominent in the future.
Another comparatively untested area is the role of the ‘unallowable purpose’ rule as a boundary rather than purely anti-avoidance provision. The decision in Keighley v HMRC [2024] UKFTT 30 (TC) (again now final) illustrates the ability of the rule to bite absent any suggestion of avoidance, and this aspect of the rule – and what is meant by a company’s business and other commercial purposes in this context – can be a source of uncertainty in some cases.
Finally, on the facts of the recent cases, the Courts have been able to deal with the consequences of the rule applying fairly briefly. Whilst providing helpful guidance, the correct approach in more nuanced cases is far from settled.
Maybe we haven’t entirely seen the end of those caveats after all.
