Company denied tax relief for interest on loans used for a tax scheme

HMRC have been successful in a recent case where they sought to deny a tax deduction for interest expense on borrowings by a company used to fund a tax avoidance scheme.

HMRC mounted their challenge using an anti-avoidance provision in the rules dealing with the taxation of companies’ finance expense – the so called “unallowable purpose” test.

The tax tribunal held that the loss scheme was ineffective. They held that as a consequence of them making this decision on the scheme, the loans had an unallowable purpose, thus the anti-avoidance provision operated to deny corporation tax relief for interest expense. The Tribunal gave a wide scope to the unallowable purpose provision.

This is the first litigation on the loan relationship unallowable purpose test since the introduction of the legislation in 1996. Whilst decisions of the First Tier Tribunal do not set precedent, it nevertheless highlights to need for all companies to take account of the Tribunal’s decision when considering corporate tax planning where loan finance is required and there is a tax avoidance motive. Leading Counsel with considerable expertise in the taxation of loan relationships were engaged by both the taxpayer and the Revenue, giving the decision considerable authority. The case may be appealed.

For more information on this topic please contact Richard Service or Rosemary Blundell.

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