Corporation tax

Loan interest payable disallowed due to unallowable purpose

The Court of Appeal (CA) has upheld the lower court’s decision that the main purpose of a loan relationship to which the taxpayer was party was to obtain a UK tax advantage. The loan therefore had an unallowable purpose, and no deduction was allowed for the resulting interest expenses.

The taxpayer, a UK incorporated company, was a member of a multinational group with its ultimate parent company in the US. It was set up to acquire a US group worth $1.1bn. The transaction involved a series of steps that sought to maximise group interest deductions whilst minimising taxable credit interest. Overall, the funding arrangements provided a deduction for third-party interest in the US, and group interest in the UK with no taxable credits in the US, UK, or Cayman Islands, where a finance company had also been set up.

The First-tier Tribunal (FTT) and the Upper Tribunal (UT) agreed that the presence of free-standing loan relationship deficits that were surrendered by way of group relief to UK members of the group, without any corresponding taxable receipts, did mean that the taxpayer had secured a tax advantage by being party to the loan relationship. Evidence, including reports and internal emails, showed the sole purpose of the funding arrangement was to obtain a UK tax advantage. The UK and Cayman Island companies had no employees or tangible assets, which further evidenced the lack of genuine commerciality in the loan agreements. The CA agreed with the tribunals, stating that the taxpayer’s purpose was “to play the part that had been devised for it so as to obtain a tax advantage” and that being so had a main purpose of tax avoidance.

The taxpayer appealed the FTT decision on the grounds that it had looked too widely, considering why the taxpayer, as opposed to another group company, was party to the loan rather than focusing on the motives of the taxpayer company alone. The UT rejected this argument stating that narrowing the interpretation of the law would go against Parliament’s intention. The CA agreed with the UT that adopting a “tunnel-vision” approach was not appropriate, and that the taxpayer having a commercial purpose for the funds did not override the avoidance purpose.

The CA ruled that the FTT was correct to conclude that the debits were wholly attributable to the unallowable purpose, and so no apportionment was required, and no deduction available for any of the interest expense arising on the loan.

JTI Acquisitions Company (2011) Ltd v HM Revenue & Customs [2024] EWCA Civ 652

From Tax Update July 2024, published by Evelyn Partners LLP

Management expenses in connection with sale of subsidiary are capital

The Supreme Court (SC) has ruled that expenses incurred by an investment holding company on the disposal of a subsidiary company are management expenses, and of a capital nature and so no relief is available.

The taxpayer, an investment holding company and member of a large group, incurred professional fees in relation to the disposal of a subsidiary company. The Court of Appeal had held that these costs were management expenses, with the SC asked to consider whether the expenses were of a capital nature.

The taxpayer argued that the words “expenses of a capital nature” had a narrower meaning than the phrase “items of a capital nature“ that applies to trading companies. This argument was dismissed, stating there is nothing to indicate that the exclusion for management expenses was intended to be narrower than that for trading companies, both are intended to exclude capital expenditure based on well-established tax case law. 

The SC went on to note that investments of a holding company are generally capital assets, and money spent on the acquisition or disposal of capital assets should be regarded as capital expenditure. The fact the taxpayer continued to hold other investments did not override the fact the costs in relation to the disposal in question were of a one-off nature. The taxpayer’s appeal was dismissed, and expenses in relation to the disposal were not deductible as expenses of management.

Centrica Overseas Holdings Ltd v HM Revenue and Customs [2024] UKSC 25

From Tax Update July 2024, published by Evelyn Partners LLP

VAT

VAT exemption for management of SIFs 

Under the EU Principal VAT Directive (PVD), the management of Special Investment Funds (SIFs) is VAT exempt. The First-tier Tribunal (FTT) has considered whether the exemption applied to fund management services provided by CCLA Investment Management Ltd to charitable, Church of England and local authority investment funds. (The periods in question pre-dated the end of the Brexit implementation period, 31 December 2020, and accordingly the PVD applied.) 

Investment funds that are constituted as undertakings for collective investment in transferable securities (UCITS) qualify as SIFs. Funds that are not a UCITS may benefit from the SIF exemption if they are equivalent to a UCITS, or sufficiently comparable so as to be in competition with a UCITS. In this respect, the EU VAT Committee (Working Paper 936) considered that funds are sufficiently comparable if, inter alia, they are subject to “specific state supervision”, and are subject to the same conditions of competition and appeal to the same investors who would invest in a UCITS. 

The FTT has held that state supervision could be indirect, so being supervised via the fund manager was sufficient, but the supervision must be financial in nature; in the UK this would require regulation by the Financial Conduct Authority. Whether funds were subject to the same conditions of competition and appeal to the same investors must be determined on a case-by-case basis. The FTT considered each of the funds, and held that in some cases, although not all, there was the requisite state supervision and the funds were subject to the same conditions of competition and appealed to the same investors who would use UCITS. Accordingly, VAT exemption would apply to some of the management services under consideration. 

The FTT noted that the decision did not cover the input tax position, so the quantum of the refund to which CCLA would be entitled remained to be determined. 

CCLA Investment Management Limited v HMRC [2024] UKFTT 636 (TC)

From the Weekly VAT News dated 29 July 2024, published by Deloitte

VAT treatment of mobile plan bundles

Lycamobile UK Ltd sold plan bundles to customers in the UK comprising rights to future telecommunication services, that is, telephone calls, text messages and data. Lycamobile considered that for VAT purposes services contained within the plan bundles were only supplied as and when the services were used, not when a customer purchased a plan bundle. The First-tier Tribunal (FTT) has disagreed, agreeing with HMRC that VAT was chargeable on the entire consideration paid on the sale of a plan, even if the allowances in the plan bundle were never used. 

The case concerned the VAT periods from 07/12 to 08/19. Prior to 1 November 2017, supplies of business-to-consumer (B2C) telecommunication services were not subject to UK VAT to the extent that they were effectively used and enjoyed outside the European Union. Accordingly, Lycamobile should be able to make a VAT adjustment to reflect any non-EU roaming charges. The FTT also held that the plan bundles were not vouchers, so the VAT rules relating to vouchers did not apply. Therefore, VAT was due on the entirety of the amount paid for plan bundles, even if part of the bundle was unused, with a potential adjustment for non-EU roaming charges pre-1 November 2017. 

Lycamobile UK Limited v HMRC [2024] UKFTT 638 (TC)

From the Weekly VAT News dated 29 July 2024, published by Deloitte