“151 “Arm’s length provision” (1) In this Part “the arm’s length provision” has the meaning given by section 147(1). (2) For the purposes of this Part, the cases in which provision made or imposed as between any two persons is to be taken to differ from the provision that would have been made as between independent enterprises include the case in which provision is made or imposed as between two persons but no provision would have been made as between independent enterprises; and references in this Part to the arm’s length provision are to be read accordingly.”
“152 Arm’s length provision where actual provision relates to securities (1) This section applies where– (a) both of the affected persons are companies, and (b) the actual provision is provision in relation to a security issued by one of those companies (“the issuing company”). (2) Section 147(1)(d) is to be read as requiring account to be taken of all factors, including– (a) the question whether the loan would have been made at all in the absence of the special relationship, (b) the amount which the loan would have been in the absence of the special relationship, and (c) the rate of interest and other terms which would have been agreed in the absence of the special relationship… (3) Subsection (2) has effect subject to subsections (4) and (5). (4) If— (a) a company (“L”) makes a loan to another company with which it has a special relationship, and (b) it is not part of L’s business to make loans generally, the fact that it is not part of L’s business to make loans generally is to be disregarded in applying subsection (2). (5) Section 147(1)(d) is to be read as requiring that, in the determination of any of the matters mentioned in subsection (6), no account is to be taken of (or of any inference capable of being drawn from) any guarantee provided by a company with which the issuing company has a participatory relationship. (6) The matters are— (a) the appropriate level or extent of the issuing company’s overall indebtedness, (b) whether it might be expected that the issuing company and a particular person would have become parties to a transaction involving— (i) the issue of a security by the issuing company, or (ii) the making of a loan, or a loan of a particular amount, to the issuing company, and (c) the rate of interest and other terms that might be expected to be applicable in any particular case to such a transaction.” (a) both of the affected persons are companies, and (b) the actual provision is provision in relation to a security issued by one of those companies (“the issuing company”). (a) the question whether the loan would have been made at all in the absence of the special relationship, (b) the amount which the loan would have been in the absence of the special relationship, and (c) the rate of interest and other terms which would have been agreed in the absence of the special relationship… (a) a company (“L”) makes a loan to another company with which it has a special relationship, and (b) it is not part of L’s business to make loans generally, (a) the appropriate level or extent of the issuing company’s overall indebtedness, (b) whether it might be expected that the issuing company and a particular person would have become parties to a transaction involving— (i) the issue of a security by the issuing company, or (ii) the making of a loan, or a loan of a particular amount, to the issuing company, and (c) the rate of interest and other terms that might be expected to be applicable in any particular case to such a transaction.”
“164 Part to be interpreted in accordance with OECD principles (1) This Part is to be read in such manner as best secures consistency between— (a) the effect given to sections 147(1)(a), (b) and (d) and (2) to (6), 148 and 151(2), and (b) the effect which, in accordance with the transfer pricing guidelines, is to be given, in cases where double taxation arrangements incorporate the whole or any part of the OECD model, to so much of the arrangements as does so. …. (3) In this section “the OECD model” means— (a) the rules which, at the passing of [theIncome and Corporation Taxes Act 1988 ] (which occurred on9 February 1988 ), were contained in Article 9 of the Model Tax Convention on Income and on Capital published by the Organisation for Economic Co-operation and Development, or (b) any rules in the same or equivalent terms. …” (a) the effect given to sections 147(1)(a), (b) and (d) and (2) to (6), 148 and 151(2), and (b) the effect which, in accordance with the transfer pricing guidelines, is to be given, in cases where double taxation arrangements incorporate the whole or any part of the OECD model, to so much of the arrangements as does so. (a) the rules which, at the passing of [theIncome and Corporation Taxes Act 1988 ] (which occurred on9 February 1988 ), were contained in Article 9 of the Model Tax Convention on Income and on Capital published by the Organisation for Economic Co-operation and Development, or (b) any rules in the same or equivalent terms. …”
“Application of the arm’s length principle is generally based on a comparison of the conditions in a controlled transaction with the conditions in transactions between independent enterprises. In order for such comparisons to be useful, the economically relevant characteristics of the situations being compared must be sufficiently comparable. To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or that reasonably accurate adjustments can be made to eliminate the effect of any such differences. In determining the degree of comparability, including what adjustments are necessary to establish it, an understanding of how unrelated companies evaluate potential transactions is required. Independent enterprises, when evaluating the terms of a potential transaction, will compare the transaction to the other options realistically available to them, and they will only enter into the transaction if they see no alternative that is clearly more attractive. For example, one enterprise is unlikely to accept a price offered for its product by an independent enterprise if it knows that other potential customers are willing to pay more under similar conditions. This point is relevant to the question of comparability, since independent enterprises would generally take into account any economically relevant differences between the options realistically available to them (such as differences in the level of risk or other comparability factors discussed below) when valuing those options. Therefore, when making the comparisons entailed by application of the arm’s length principle, tax administrations should also take these differences into account when establishing whether there is comparability between the situations being compared and what adjustments may be necessary to achieve comparability.”
“… In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm’s length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm’s length dealings. Attributes that may be important include the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the economic circumstances of the parties, and the business strategies pursued by the parties…”
“… the experts agree that it would have been possible for LLC5 to execute a$4 billion debt transaction in December 2009 with an independent enterprise at similar interest rates to the actual transaction that took place between LLC5 and LLC4, but subject to different terms and conditions that independent lenders would have required to manage the credit risks appropriately.”
“In evidence Mr Ashley also agreed that a covenant would be required to ensure that LLC6, if it was going to do so, would pay a dividend to LLC5 first to, “make sure that it is effectively honouring the preference shares which are preferred and pay that dividend flow first.”
“f. The preference share structure was unusual but not necessarily problematic given BGI US was already a successfully performing business. The preference shares carried an expectation that [LLC5] should receive over USD700m annually in income which would have given it a sizeable debt capacity. The main issue was that the flow of value from BGI US to LLC6 and then to [LLC5] via the preference shares was paid at the discretion of LLC4. Whilst a lender would probably be unlikely to accept this position, it should have been possible for BGI US, and LLC6 – with the explicit consent of LLC4 – to effectively ratify the legal and financial position to which [LLC5] was entitled, that is via inter-company agreements and covenants which would have formed part of [LLC5’s] borrowing transaction. Both experts agree that an independent lender would have required the protection described in this paragraph and that it probably could have been put in place. Mr Gaysford believes that it would have been costly and complex to do so. Mr Ashley believes it would have been straightforward and the associated ‘cost’ would have been an ‘opportunity cost’ (ie reduced flexibility to enter into further transactions rather than a cash cost). g. In addition to the protections discussed in f above, the purpose of which would have been to secure the flow of value from BGI US and preference share dividends from LLC6, the experts agree that an independent lender would likely also have required other structural enhancements to the terms of the loans, to ensure the cashflow generation of BGI US could not be diverted in any way. Possible additional clauses would include (1) a negative pledge on further indebtedness within BGI US, LLC6 or indeed [LLC5], (2) a change of control clause and (3) a restriction on BGI US or LLC6 being able to lend money to any other entity – whether inside the BlackRock Group or not. These are well known standard clauses required in almost every external debt transaction – though to emphasise, one would not expect to see them in an inter-company loan transaction within a group. h. The experts cannot say with certainty whether all of the possible additional clauses listed in paragraph g would have been required to support a USD4bn loan or bond transaction by [LLC5]. However, in view of the structural subordination of LLC5 (being 2 entities away from the generation of cashflows), the experts agree that an independent lender would have required at least some of the enhancements discussed in paragraph g. i. Again, both experts agree that the enhancements discussed in paragraph g would have been necessary, and probably could have been achieved. Mr Ashley believes it would have been straightforward to do so and that the associated ‘cost’ would have been an ‘opportunity cost’ (ie reduced flexibility to enter into further transactions) rather than a cash cost. In Mr Ashley’s experience, such enhancements are very common terms in debt transactions, including the BlackRock’s group own revolving credit facility. Mr Gaysford believes it would have been costly and complex to do so, and that any ‘opportunity cost’ would have been significant.”
“102. Both experts agreed that an independent lender would have entered into an arrangement subject to it being able to obtain the necessary covenants. On balance, given that Mr Gaysford accepted that his concerns in relation to cost and complexity did not amount to “deal breakers”, I prefer the evidence of Mr Ashley that the covenants would have been forthcoming. Similarly I prefer the evidence of Mr Ashley regarding parental support especially as Mr Gaysford was unable to say with “certainty” that the transaction would not have proceeded in its absence. 103. Therefore, for the reasons above I find that although an independent enterprise would not have entered into the Loan on the same terms as the actual transaction it would, subject to the covenants described above, have entered into the Loans on the same terms as the parties in the actual transaction.”
“economically relevant characteristics”
“But it is clear to us that that interpretation is not consistent with the OECD model … and therefore that [the legislation] should be interpreted as requiring consideration of what provision independent enterprises sharing the characteristics of the actual enterprises would have made.”
“(5) Section 147(1)(d) is to be read as requiring that, in the determination of any of the matters mentioned in subsection (6), no account is to be taken of (or of any inference capable of being drawn from) any guarantee provided by a company with which the issuing company has a participatory relationship.”
“(1) a covenant for the benefit of the third party investors ensuring that LLC6 will pay the preference share dividends to LLC5 in advance of anything paid to holders of the ordinary shares; (2) a covenant in favour of the third party investors to the effect that no other form of cash distribution from LLC6 to holders of the ordinary shares (e.g. loans or loan repayments) was permitted as a means of subverting the preference share dividends; or (3) a signed consent and acknowledgement or other appropriate undertaking from LLC4 as the holder of the ordinary shares to the effect that nothing was able to interrupt the preference share dividend payments from LLC6 to LLC5 and / or that it would take no steps to subvert payment of the preference share dividends to LLC5.”
“i) A company had an “unallowable purpose” if its purposes included one that was “not amongst the business or other commercial purposes of the company” (see paragraph 13(2) of schedule 9 to FA 1996 ); ii) A tax avoidance purpose was not necessarily fatal. It was to be taken to be a “business or other commercial purpose” unless it was “the main purpose, or one of the main purposes, for which the company is a party to the relationship” (see paragraph 13(4)); iii) It was the company’s subjective purposes that mattered. Authority for that can be found in the decision of the House of Lords in Inland Revenue Commissioners v Brebner[1967] 2 AC 18 , which concerned a comparable issue, viz. whether transactions had as “their main object, or one of their main objects, to enable tax advantages to be obtained”
“We consider, in the present case, that when Miss Mallalieu laid out money on clothes for wearing in court her purpose in making that expenditure was to enable her to earn profits in her profession and also to enable her to be properly clothed during the time she was on her way to chambers or to court and while she was thereafter engaged in her professional activity, and in the other circumstances indicated in paragraph 2 we do not consider that the fact that her sole motive in choosing the particular clothes was to satisfy the requirements of her profession or that if she had been free to do so she would have worn clothes of a different style on such occasions altered the purpose of the expenditure which remained the purpose of purchasing clothes that would keep her warm and clad during the part of the day when she was pursuing her career as well as the purpose of helping her to earn profits in that career. We think, therefore, that the expenditure had a dual purpose one professional and one non-professional ...”
“To ascertain whether the money was expended to serve the purposes of the taxpayer’s business it is necessary to discover the taxpayer’s “object” in making the expenditure: see Morgan v Tate & Lyle Ltd.[1955] AC 21 , 37, 47. As the taxpayer’s “object” in making the expenditure has to be found, it inevitably follows that (save in obvious cases which speak for themselves) the commissioners need to look into the taxpayer’s mind at the moment when the expenditure is made. After events are irrelevant to the application of section 130 except as a reflection of the taxpayer’s state of mind at the time of the expenditure. If it appears that the object of the taxpayer at the time of the expenditure was to serve two purposes, the purposes of his business and other purposes, it is immaterial to the application of section 130 (a) that the business purposes are the predominant purposes intended to be served. The object of the taxpayer in making the expenditure must be distinguished from the effect of the expenditure. An expenditure may be made exclusively to serve the purposes of the business, but it may have a private advantage. The existence of that private advantage does not necessarily preclude the exclusivity of the business purposes. For example, a medical consultant has a friend in the South of France who is also his patient. He flies to the South of France for a week, staying in the home of his friend and attending professionally upon him. He seeks to recover the cost of his air fare. The question of fact will be whether the journey was undertaken solely to serve the purposes of the medical practice. This will be judged in the light of the taxpayer’s object in making the journey. The question will be answered by considering whether the stay in the South of France was a reason, however subordinate, for undertaking the journey, or was not a reason but only the effect. If a week’s stay on the Riviera was not an object of the consultant, if the consultant’s only object was to attend upon his patient, his stay on the Riviera was an unavoidable effect of the expenditure on the journey and the expenditure lies outside the prohibition in section 130.”
“My Lords, I find myself totally unable to accept this narrow approach. Of course Miss Mallalieu thought only of the requirements of her profession when she first bought (as a capital expense) her wardrobe of subdued clothing and, no doubt, as and when she replaced items or sent them to the launderers or the cleaners she would, if asked, have repeated that she was maintaining her wardrobe because of those requirements. It is the natural way that anyone incurring such expenditure would think and speak. But she needed clothes to travel to work and clothes to wear at work, and I think it is inescapable that one object, though not a conscious motive, was the provision of the clothing that she needed as a human being. I reject the notion that the object of a taxpayer is inevitably limited to the particular conscious motive in mind at the moment of expenditure. Of course the motive of which the taxpayer is conscious is of a vital significance, but it is not inevitably the only object which the commissioners are entitled to find to exist. In my opinion the commissioners were not only entitled to reach the conclusion that the taxpayer’s object was both to serve the purposes of her profession and also to serve her personal purposes, but I myself would have found it impossible to reach any other conclusion.”
“One is, accordingly, brought back, first, last and all the time to the question whether an expenditure upon a partner’s removing expenses can be said to be laid out not just partly but exclusively for the purposes of the partnership business. That cannot, in my judgment, be answered simply by ascertaining what was the motive with which the move was undertaken. It is inescapable as it seems to me, that the expenditure, motivated no doubt by the fact of moving house, which in turn was motivated by the desire to put the partner concerned in a better position to further the interests of the firm, was an expenditure serving and necessarily and inherently intended to serve the personal interests of the partner in establishing his private residence for himself and his family and it cannot be said to be exclusively for the purposes of the partnership practice. Your Lordships have been referred to what may be regarded as a seminal decision of this House in Mallalieu v Drummond[1983] 2 AC 861 and much argument has been addressed to the question whether the purpose of the particular payment falls to be ascertained objectively or by reference only to the subjective intention of the payer. For my part, I think that the difficulties suggested here are more illusory than real. The question in each case is what was the object to be served by the disbursement or expense? As was pointed out by Lord Brightman in Mallalieu’s case, this cannot be answered simply by evidence of what the payer says that he intended to achieve. Some results are so inevitably and inextricably involved in particular activities that they cannot but be said to be a purpose of the activity. Miss Mallalieu’s restrained and sober garb inevitably served and cannot but have been intended to serve the purpose of preserving warmth and decency and her purpose in buying cannot but have been, in part at least, to serve that purpose whether she consciously thought about it or not. So here the payment of estate agents’ fees, conveyancing costs and so on, and the provision of carpets and curtains cannot but have been intended to serve the purpose of establishing a comfortable private home for the partner concerned even though his motive in establishing a home in that particular place was to assist him in furthering the partnership interests. Nobody could say with any colour of conviction that in purchasing new curtains he or his wife was acting upon partnership business. In my judgment once one escapes from what I regard as the fallacy of confusing the purpose of the expenditure with the motives of the members of the executive committee (and, inferentially, of the other partners) in resolving to reimburse the expenditure, the case presents very little difficulty and is, indeed, a much clearer and easier case than Mallalieu v Drummond. For my part, I entertain no doubt that the decision of Vinelott J was correct and I would allow this appeal.”
“In the case of an individual taxpayer, the other purpose is usually a private purpose of his own. In a case like the present, where the taxpayer company is a company forming part of a group, the other purpose is likely to be the purpose of the trade of one or more of the other companies in the group. But the same principles apply. The trade of a parent company is for tax purposes distinct from the trade of its subsidiary. The two companies are separate taxable persons, and the trade or business of one is not the same as the trade or business of the other, however closely it may affect it (see Odhams Press Ltd v Cook (Inspector of Taxes) (1938) 23 TC 233 at 254, 257). The leading modern cases on the application of the exclusively test are Mallalieu v Drummond(Inspector of Taxes)[1983] STC 665 ,[1983] 2 AC 861 and MacKinlay (Inspector of Taxes) v Arthur Young McClelland Moores & Co[1989] STC 898 ,[1990] 2 AC 239 . From these cases the following propositions may be derived. (1) The words for the purposes of the trade mean to serve the purposes of the trade. They do not mean for the purposes of the taxpayer but for the purposes of the trade, which is a different concept. A fortiori they do not mean for the benefit of the taxpayer. (2) To ascertain whether the payment was made for the purposes of the taxpayer's trade it is necessary to discover his object in making the payment. Save in obvious cases which speak for themselves, this involves an inquiry into the taxpayer’s subjective intentions at the time of the payment. (3) The object of the taxpayer in making the payment must be distinguished from the effect of the payment. A payment may be made exclusively for the purposes of the trade even though it also secures a private benefit. This will be the case if the securing of the private benefit was not the object of the payment but merely a consequential and incidental effect of the payment. (4) Although the taxpayer’s subjective intentions are determinative, these are not limited to the conscious motives which were in his mind at the time of the payment. Some consequences are so inevitably and inextricably involved in the payment that unless merely incidental they must be taken to be a purpose for which the payment was made. To these propositions I would add one more. The question does not involve an inquiry of the taxpayer whether he consciously intended to obtain a trade or personal advantage by the payment. The primary inquiry is to ascertain what was the particular object of the taxpayer in making the payment. Once that is ascertained, its characterisation as a trade or private purpose is in my opinion a matter for the commissioners, not for the taxpayer. Thus in Mallalieu v Drummond (Inspector of Taxes) the primary question was not whether Miss Mallalieu intended her expenditure on clothes to serve exclusively a professional purpose or partly a professional and partly a private purpose, but whether it was intended not only to enable her to comply with the requirements of the Bar Council when appearing as a barrister in court but also to preserve warmth and decency. Similarly, in my opinion, the present case does not involve an inquiry whether the directors who resolved to enter into the fee cancellation agreement consciously intended to obtain a benefit thereby for one company rather than another. The primary inquiry is to ascertain the particular object which the directors sought to achieve by it. Once that is ascertained the characterisation of that object as serving the purposes of the trade of one particular company or another is not a finding of primary fact, but a conclusion based upon the primary facts.”
“3. REVIEW OF STEP PLAN AND COMPANY’S ROLE The Chairman invited Mr Fleming to present an overview of the Step Plan and an outline [of] the Company’s role. Mr Fleming advised that although the incorporation of the Company and the proposed transactions formed part of wider arrangements to effect the Acquisition in a taxefficient manner they were, nevertheless, a commercially valid transaction for the Company on a stand alone basis. The Company formed part of the structure that was to acquire Barclays Global Investors, National Association. It was noted that a tax opinion had been provided by Ernst & Young LLC (E&Y) supported by consultations with Kevin Prosser QC (senior tax counsel) and that Duff & Phelps had produced a fair purchase price allocation (included in the Board Materials) which had been agreed with Barclays PLC. Mr Fleming updated the board on the UK debt cap rules which were being introduced for accounting periods beginning on or after1 January 2010 and which potentially restricted the UK tax deduction for interest costs of UK companies which formed part of a large group. The rules would mean that aggregate UK corporation tax deductions for financing costs could not exceed the group’s external financing costs on a worldwide basis. The group had USD6bn of debt before the cap applied which comprised USD4.5bn in BlackRock Finco UK ltd and USD1.5bn in the Company. E&Y had determined a supportable level of debt and interest rate from a UK tax perspective by comparing key financial ratios (debt to equity, debt to earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and interest cover) with other similar companies. These were reviewed extensively by the board to ensure that, at the level of debt to be incurred, the transaction was appropriate and commercial for the Company. It was noted that the Company itself would gain no benefit from a UK tax deduction for the interest, since it was group policy for such interest to be surrendered between group affiliates for no payment – it was necessary for the transaction to be considered by the board as viable for the Company without taking any UK tax advantage into account. E&Y had concluded that, after the Acquisition, BlackRock’s pre-eminence within the asset management industry would enable it to obtain financing on the most favourable terms and at the top of the range in respect to its peer group. Mr Fleming did not consider the Company’s debt amounts, which had been put to HM Revenue and Customs (“HMRC”) unreasonable. The structure would give rise to interest deductions between USD50 and USD70m per annum, with a larger interest deduction of USD29m in December 2009 since the debt cap rules were not in effect during that month. Mr Fleming stated that HMRC currently considered BlackRock to be low risk, and that he did not feel that structuring the Acquisition in a tax-efficient manner was inconsistent with HMRC’s position. Although the proposals were complex, the main purpose was to complete a third party transaction and there was no element of tax avoidance. If the Acquisition resulted in the group being viewed as medium or high risk there would be increased scrutiny of other issues such as transfer pricing. It was noted that there were no UK regulatory implications….”
“Mr Fleming emphasized that, although the Company was incorporated in the state of Delaware in the United States, management and control would be exercised from London, where the Company’s books and records would also be kept. It was anticipated that the Management Board would meet two to three times each year or more frequently when required by the Company’s affairs.”
“40. The ‘purpose’ of LLC5, and therefore its corporate mission or aim, was to facilitate the acquisition of BGINA in a manner that was efficient from all perspectives including tax, as recorded in the minutes of the30 November 2009 Board meeting. However, to me the key aspect of this was the acquisition of BGINA, with the potential for efficiencies being very much a secondary consideration. Certainly by the time the LLC5 Board meeting took place on30 November 2009 , any tax considerations had been eclipsed by the desire to complete the Acquisition. The ultimate goal from the perspective of the BlackRock Group was to acquire BGINA and that aim was unaffected by any tax efficiencies that might follow from structuring the acquisition in a particular manner. Capital transactions as significant as the BGI Acquisition require considerable time and resources to plan and cannot be revised at late stages if it transpires that certain anticipated tax or other consequences may not materialise. If by November 2009 Corporate Tax Group had formed the view that there were no efficiencies to be made by acquiring BGINA through LLC5, LLC5’s place and purpose in the acquisition structure would have been unchanged. If by this late stage the anticipated tax benefits of structuring the acquisition in a particular manner had for any reason fallen away, it would have been too late to revise the structure and the acquisition would have gone ahead as planned, subject to the considerations I have highlighted in this statement about the need for the LLC5 Board to have been satisfied that the proposed transactions represented a commercially sound and appropriate investment for LLC5 to make. By November 2009, LLC5’s purpose in the Acquisition structure was not dependent on any tax efficiencies that might result from acquiring BGINA through LLC5. Its purpose by that stage was to raise capital which it could invest in LLC6 in order to finance the acquisition. 41. When resolving to enter into the transactions that were proposed at the meeting on30 November 2009 as a member of the LLC5 Board, I was looking to complete the proposed investment in BGINA via LLC6. It was necessary for the LLC5 Board to satisfy itself that both the proposed investment (i.e. the investment in LLC6) and the proposed means of financing that investment (i.e. the Loan Notes) represented a good deal for LLC5 as an individual entity and I explain above the basis on which that conclusion was reached and the considerations that had to be taken into account. Having satisfied myself that the proposed investment in BGINA via LLC6 was in the commercial interest of LLC5, my purpose in resolving that LLC5 should proceed with issuing the Loan Notes to LLC4 was to raise capital to finance the onward investment in LLC6 and BGINA in a manner that I considered was also in the best interests of LLC5 as an individual entity. 42. The minutes of the LLC5 Board meeting on30 November 2009 (JRK1/12 to 25) record Mr Fleming advising the Board members that ‘it was necessary for the transaction to be considered by the board as viable for the Company without taking any UK tax advantage into account.’ I cannot now recall the details of the board meeting but I have no reason to think that I would not have acted in accordance with Mr Fleming’s advice. Moreover, for the reasons that I have explained above, if a transaction had not been viable for LLC5 in commercial, financial and governance terms, the LLC5 Board members would not and could not have resolved to enter into it.”
“119. Although, and perhaps not surprisingly as it was some ten years before the hearing, Mr Kushel could not recall the details of the board meeting held on30 November 2009 but said that he had not taken account of any UK tax advantage into account in making the decision to proceed with the transaction. Minutes of the meeting confirm that Mr Fleming advised that such an approach should be taken and Mr Kushel believed he had followed this advice and the minutes do not record that any of the other Board members had not done so. Also, Mr Kushel said that as he was comfortable with it and had [no] concerns over its commercial viability the transaction would have proceeded even if, at the last minute, the tax advantage had ceased to exist. Additionally, he confirmed that, in making the decision to approve LLC5 entering into the Loans, he considered his fiduciary duty was satisfied. 120. Mr Kushel did not go so far as Ms Mallalieu, who “had no thought of warmth and decency” when she bought her “working clothes”, and say that a tax advantage was not an object or purpose of LLC5. However, adopting the reasoning of the House of Lords in Mallalieu v Drummond as further explained in Vodafone to the present case it is necessary to look beyond the conscious motives of LLC5 and take account of the inevitable and inextricable consequences of it entering the loan relationship with LLC4. Having regard to all the circumstances of the case it is, in my judgment, clear that the securing of a tax advantage is an inevitable and inextricable consequence of the Loan between LLC4 and LLC5. 121. This cannot be described as merely incidental and, as such, is clearly an important purpose, so much so that I consider it to be a main purpose of LLC5 in entering into the Loans. However, the evidence is that LLC5 entered into the Loans in the furtherance of the commercial purpose of its business of making and managing passive investments. This too is clearly an important purpose and, as such, is to be regarded as a main purpose also.”
“… it should have relied on the principles derived from TDS, the only authority on this legislative wording. The FTT should have considered LLC5’s main purposes in relation to the Loans from all the evidence before it rather than apparently focusing solely on the “inevitable and inextricable consequences” of entering into the Loans.”
“162. Nevertheless, we are not satisfied that there was any material error in the FTT’s finding that LLC5 also held a tax advantage main purpose in relation to the Loans. The FTT was entitled to look beyond the stated motives of LLC5’s board members when determining the purposes of LLC5 in entering into the Loans. 163. There are two important matters to bear in mind. First, Mr Kushel accepted in his witness statement at [40] that tax efficiencies were part of the purpose for the inclusion of LLC5 in the transaction, albeit he said that it was the secondary purpose and not the key purpose. The FTT made a similar finding at [120] that ‘Mr Kushel did not go so far as Ms Mallalieu, … and say that a tax advantage was not an object or purpose of LLC5.’ 164. Second, it is undisputed, as evidenced in the minutes of the board meeting of30 November 2009 and in Mr Kushel’s statement, that the board members of LLC5 were specifically advised to put any tax advantage out of their minds when considering the viability and hence whether to approve the Loans. As a result of this advice, the stated subjective intentions of the only director to give evidence were circumscribed and cannot represent the nature of the directors’ intentions had they been left freely and willingly to decide the main purposes of the transaction. 165. Therefore, it is necessary to look beyond the directors’ stated intentions. The effectiveness of anti-avoidance legislation cannot be undermined by tax advisers telling parties to ignore the tax advantage purposes of a transaction which has been planned by them or others for precisely that purpose. To hold otherwise would provide an easy way round the legislation. 166. We therefore conclude that the FTT was entitled to look beyond the stated motives or intentions of the board members to determine LLC5’s actual subjective purpose. This is supported by the approach in TDS where it is apparent that Newey LJ was prepared to infer a different purpose for Mr Turner using the shares in the swap (namely a tax advantage) than he stated in his evidence to be his subjective intention for continuing to hold the shares (which was an exclusively commercial purpose). 167. In our view there was ample evidence, as explained below, to support the finding that securing a tax advantage for the Group (which is a tax advantage to LLC5) was a main purpose of the creation of LLC5 and thereafter, its intention and purpose in entering into the Loans. These purposes were subjectively held by LLC5, even if the directors were told to disregard them in considering their approval to entering into the Loans.”
“180. The evidence is that the BlackRock Group would not have used an acquisition structure with a UK resident LLC in the absence of the UK tax benefits of doing so. Absent those tax benefits, LLC5 would not have existed and so obviously would not have entered into the Loans to acquire the Preference Shares. LLC5 was aware of this when it approved the Loans. 181. The FTT’s findings therefore demonstrate that LLC5 was only included in the structure and thereby entered into the Loans so as to take the tax benefits for the Group. LLC5 contended that it merely being engaged in tax planning does not mean that it had a tax avoidance main purpose. It argued that in any case involving a substantial borrowing for commercial purposes, the borrower will take tax advice and will be told that the interest is deductible; this cannot mean that there is a tax main purpose. That might be true where the borrowing is needed for and driven by the commercial purposes. In this case, however, the borrowing by LLC5 specifically in the structure for that purpose was primarily motivated by securing a tax advantage. 182. The FTT was therefore entitled to find that LLC5 had a tax advantage purpose as one of its main purposes and as a main purpose of the Loans. The FTT did not make a material error of law in finding that LLC5 had an unallowable tax advantage purpose as a main purpose of the Loans it entered into.”
“122. Having come to the conclusion that there was a commercial and a tax purpose, it is therefore necessary to consider a “just and reasonable apportionment”, as required by s 441 CTA 2009. In doing so I have adopted the approach taken by Judge Beare in Oxford Instruments [Oxford Instruments UK 2013 Limited v HMRC[2019] UKFTT 254 (TC) ]. 123. The evidence of Mr Kushel is that LLC5 would have entered into the Loans with LLC4 even if there had been no tax advantage in doing so. Like Judge Beare, and as the tax advantage purpose has not increased the debits, I consider that, on a just and reasonable basis, that all of the relevant debits arising in respect of the Loans should be apportioned to the commercial main purpose rather than the tax advantage main purpose.”
“the Chairman [Mr Kushel] proposed that the Company enter into a series of transactions in accordance with the Project Onyx Closing Step Plan prepared by Ernst & Young LLP.”