FTT provides guidance on the extent of counteraction

What is anti-avoidance legislation meant to do? That was the question lurking in the background of the First-tier Tribunal’s decision in Blackfriars Hotel (UK) Holdings Ltd v HMRC [2024] UKFTT 1095, rejecting the taxpayer’s challenge to the quantum of a counteraction under the anti-loss refreshing regime in Part 14B Corporation Tax Act (CTA) 2010. The Tribunal’s approach, which sought to resolve the interpretative difficulties in a way which best gave effect to its understanding of the purpose of this anti-avoidance rule, whilst unsurprising, indicates how difficulties in identifying the required counteraction under other anti-avoidance rules might be approached. The decision also provides a helpful reminder of the usual meaning of the concept (widely used in tax legislation) of A being ‘as a result of’ B.

The taxpayer company had been structurally loss-making for tax purposes, as it had significant third-party borrowings (resulting in tax deductible interest costs) which had primarily been used to subscribe for equity in a subsidiary company (from which it received non-taxable dividends). The company therefore had significant losses carried forward, which, as these had largely originally arisen prior to 1 April 2017, could only be used against future profits of the company itself and not surrendered as group relief.

The company implemented an arrangement whereby the subsidiary reduced its share capital and paid a large dividend to the taxpayer company, which used this to fund a new interest-bearing loan to the subsidiary. The effect of this arrangement was that the company had a pre-tax profit against which it sought to offset brought forward losses, so that in substance the benefit of these was passed to the subsidiary company.

HMRC argued that the anti-loss refreshing rules in Part 14B CTA 2010 blocked the use of any of the brought forward losses.

It was common ground that the conditions for the anti-avoidance to apply were largely met (including that a main purpose of the arrangements was to obtain a relevant tax advantage), but the taxpayer sought to argue that the required restriction in its ability to use its losses was either nil or less than the full relief claimed. In other words, the taxpayer’s position was that even if the anti-avoidance legislation applied, this still left it in a more favorable position than if it hadn’t implemented the arrangements at all.

The legislation operated by restricting the taxpayer’s ability to use historic losses to shelter profits arising ‘as a result of’ the arrangements. The taxpayer’s arguments in essence were that either this rule could note bite at all unless all the taxpayer’s profits arose ‘as a result of’ the arrangements, or alternatively that profits identified by this test were limited to the surplus of the income generated by the new loan over costs of the existing bank debt.

In approaching this interpretative dispute, the Tribunal pointed to a number of authorities emphasising the need to construe legislation generally, and anti-avoidance legislation in particular, in light of its purpose – going so far as to accept “this approach to the interpretation of anti-avoidance provisions as a free-standing principle, notwithstanding the more general ascendancy of purposive interpretation”.

In seeking to apply that approach, the Tribunal noted on the one hand that “it is hard to see why Parliament would want a company which engaged in arrangements within the scope of [the anti-avoidance] to be able to improve its position in any way at all”, and on the other that there was nothing to suggest that the intended effect of the rules was “ to punish a company for engaging in tax arrangements, as it could end up in a worse position than if it had not done so”.

Given this, the Tribunal had “no hesitation” in first rejecting the argument that no restriction was required, and in then concluding that the correct approach to identifying the profits which had arisen ‘as a result of’ the arrangements was to compare the actual position with that if the arrangements had not been implemented. In justifying this conclusion as a legitimate reading of the statutory wording, the Tribunal provided a helpful summary of recent case law on the concept of A being ‘as a result of’ B, which repays reading if considering similarly worded tests.

The decision matters, if only because of the previous lack of judicial guidance on this broadly drafted regime, which needs to be considered carefully whenever groups implement arrangements potentially impacting their ability to utilise pre-2017 tax losses.

The decision is also interesting, however, as providing a clear illustration of what the purposive approach to interpretation can mean for applying the counteraction provisions of anti-avoidance rules. These are often intentionally drafted to allow flexibility (for example, simply requiring a ‘just and reasonable’ adjustment). In this context, the Tribunal’s assumption that, in the absence of contrary evidence, Parliament intends to eliminate the benefit from participating in the arrangements being targeted (and no more or less than this) may indicate a potential approach to other future disputes over what constitutes an appropriate counteraction under other anti-avoidance rules.

For further information please contact:

• Paul Freeman
• Iain Kerr