“1139 “Tax advantage” (1) This section has effect for the purposes of the provisions of the Corporation Tax Acts which apply this section. (2) “Tax advantage” means— (a) a relief from tax or increased relief from tax, (b) a repayment of tax or increased repayment of tax, (c) the avoidance or reduction of a charge to tax or an assessment to tax, (d) the avoidance of a possible assessment to tax… (3) For the purposes of subsection (2)(c) and (d) it does not matter whether the avoidance or reduction is effected— (a) by receipts accruing in such a way that the recipient does not pay or bear tax on them, or (b) by a deduction in calculating profits or gains.” (Section 1139 CTA 2010 is applied to the loan relationships code by s.476(1) CTA 2009.) (a) a relief from tax or increased relief from tax, (b) a repayment of tax or increased repayment of tax, (c) the avoidance or reduction of a charge to tax or an assessment to tax, (d) the avoidance of a possible assessment to tax… (a) by receipts accruing in such a way that the recipient does not pay or bear tax on them, or (b) by a deduction in calculating profits or gains.”
“174 Claim by the affected person who is not potentially advantaged (1) Subsection (2) applies if— (a) only one of the affected persons (in this Chapter called “the advantaged person”) is a person on whom a potential advantage in relation to United Kingdom taxation is conferred by the actual provision, and (b) the other affected person (in this Chapter called “the disadvantaged person”) is within the charge to income tax or corporation tax in respect of profits arising from the relevant activities (see section 216). (2) On the making of a claim by the disadvantaged person— (a) the profits and losses of the disadvantaged person are to be calculated for tax purposes as if the arm's length provision had been made or imposed instead of the actual provision, and (b) despite any limit in the Tax Acts on the time within which any adjustment may be made, all such adjustments are to be made in the disadvantaged person’s case as may be required to give effect to the assumption that the arm’s length provision was made or imposed instead of the actual provision. …” (a) only one of the affected persons (in this Chapter called “the advantaged person”) is a person on whom a potential advantage in relation to United Kingdom taxation is conferred by the actual provision, and (b) the other affected person (in this Chapter called “the disadvantaged person”) is within the charge to income tax or corporation tax in respect of profits arising from the relevant activities (see section 216). (a) the profits and losses of the disadvantaged person are to be calculated for tax purposes as if the arm's length provision had been made or imposed instead of the actual provision, and (b) despite any limit in the Tax Acts on the time within which any adjustment may be made, all such adjustments are to be made in the disadvantaged person’s case as may be required to give effect to the assumption that the arm’s length provision was made or imposed instead of the actual provision. …”
“446 Bringing into account adjustments made under Part 4 of TIOPA 2010 (1) This section deals with the credits and debits which are to be brought into account for the purposes of this Part as a result of Part 4 of TIOPA 2010 (provision not at arm’s length) applying in relation to a company’s loan relationships or related transactions. (2) Subsection (3) applies if under Part 4 of TIOPA 2010 an amount (“the imputed amount”) is treated as an amount of profits or losses arising to a company from any of its loan relationships or related transactions. (3) Credits or debits relating to the imputed amount are to be brought into account for the purposes of this Part to the same extent as they would be in the case of an actual amount of such profits or losses. (4) Subsection (5) applies if under Part 4 of TIOPA 2010 an amount is treated as interest payable under any of a company's loan relationships. (5) Credits or debits relating to that amount are to be brought into account for the purposes of this Part to the same extent as they would be in the case of an actual amount of such interest. …”
“29. As recorded in Appendix 1, following these steps, the interest rates on receivables held by Speedy 1 [were] either set at or increased to LIBOR + 5%. This included both receivables assigned to Speedy 1 and … the receivable which had already been owed by KFG to Speedy 1. 30. The interest rate on intra-group loans that were not involved in the reorganisation was not increased. Such loans included loans between other companies within the Kwik-Fit Group where Speedy 1 was not the creditor, and a loan of£57.6m owed by Speedy 1 to Detailagent (a subsidiary of [Kwik-Fit Euro Limited, the Fifth Appellant]) (the “Detailagent Loan”).”
“115. We do not consider that the existence of the transfer pricing legislation, its application to the Pre-existing Loans (or the New Loans), the decision not to charge this higher rate of interest on other loans in the Kwik-Fit Group that were not involved in the reorganisation, or HMRC’s failure to challenge that rate assist with the Appellants’ argument: (1) Section 147 TIOPA 2010 requires that the profits and losses of a potentially advantaged person (in this case Speedy 1) are to be calculated for tax purposes as if the arm’s length provision had been imposed instead of the actual provision. This therefore requires that tax is calculated as if an arm’s length rate of interest is received; it does not require that such a rate of interest is actually imposed. (2) It is only if tax is calculated on the basis of an arm’s length provision rather than the actual provision that another affected party (in this case the Appellants) may make a claim so that their taxable profits are calculated as if the arm’s length provision had been made. (3) Following the reorganisation, the higher interest rate of LIBOR + 5% was charged on the Pre-existing Loans, ie the loans within the Kwik-Fit Group that were repayable to Speedy 1. This higher rate of interest was not charged on the Detailagent Loan (which was owed by Speedy 1) or on loans owing between other members of the Kwik-Fit Group. The group was taking decisions to manage the amount of net interest income in Speedy 1 – if Speedy 1 had paid out the higher rate of interest on the Detailagent Loan then this would have had the effect of slowing down the rate of utilisation of the [non-trading deficits]. (4) Having referred to the fact that the higher rate of interest was not applied to all loans within the group, Mr Andrews stated that had they applied transfer pricing, those loans would become tax neutral anyway. One difficulty with this argument is that we are not satisfied that the Kwik-Fit Group applied the transfer pricing legislation to those other loans when calculating the profits and losses of the creditors and accordingly no claim was made, or was able to be made, by the debtors for a corresponding adjustment. (5) The selective approach adopted within the group relates therefore not just to the decision as to the actual provision to impose (ie whether the debtors should pay the higher rate of LIBOR + 5%) but also as to whether to apply the (mandatory) transfer pricing legislation.” (1) Section 147 TIOPA 2010 requires that the profits and losses of a potentially advantaged person (in this case Speedy 1) are to be calculated for tax purposes as if the arm’s length provision had been imposed instead of the actual provision. This therefore requires that tax is calculated as if an arm’s length rate of interest is received; it does not require that such a rate of interest is actually imposed. (2) It is only if tax is calculated on the basis of an arm’s length provision rather than the actual provision that another affected party (in this case the Appellants) may make a claim so that their taxable profits are calculated as if the arm’s length provision had been made. (3) Following the reorganisation, the higher interest rate of LIBOR + 5% was charged on the Pre-existing Loans, ie the loans within the Kwik-Fit Group that were repayable to Speedy 1. This higher rate of interest was not charged on the Detailagent Loan (which was owed by Speedy 1) or on loans owing between other members of the Kwik-Fit Group. The group was taking decisions to manage the amount of net interest income in Speedy 1 – if Speedy 1 had paid out the higher rate of interest on the Detailagent Loan then this would have had the effect of slowing down the rate of utilisation of the [non-trading deficits]. (4) Having referred to the fact that the higher rate of interest was not applied to all loans within the group, Mr Andrews stated that had they applied transfer pricing, those loans would become tax neutral anyway. One difficulty with this argument is that we are not satisfied that the Kwik-Fit Group applied the transfer pricing legislation to those other loans when calculating the profits and losses of the creditors and accordingly no claim was made, or was able to be made, by the debtors for a corresponding adjustment. (5) The selective approach adopted within the group relates therefore not just to the decision as to the actual provision to impose (ie whether the debtors should pay the higher rate of LIBOR + 5%) but also as to whether to apply the (mandatory) transfer pricing legislation.”
“The effect of the proposed transaction is that the interest-paying entities below Speedy 1 would obtain tax relief on their payments and thereby reduce their respective tax liabilities, whilst the interest income arising in Speedy 1 would be offset against the brought forward [non-trading deficits] without incurring any tax liability.”
“… the increase in interest rate was a significant additional cost which the Appellants agreed to incur in respect of their existing borrowings. The consequence of this was that the Appellants benefitted from greater interest debits and Speedy 1 was able to use its NTDs over a shorter period of time. We have concluded that the only reason the Appellants agreed to incur [the higher rate of interest on the Pre-existing Loans] was to secure the intended tax advantages for themselves and for Speedy 1. If they had not consented to this increased interest expense, they would have continued to borrow at the cheaper rate from the original creditor (albeit that Speedy 1 was also the original creditor under the KFG Loan). It is the decision to incur this additional cost, rather than agreeing to the assignments of the debt and thus the change in creditor, which we regard as being of greatest significance.”
“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”
“a) Save in “obvious” cases, ascertaining the object or purpose of something involves an inquiry into the subjective intentions of the relevant actor. b) Object or purpose must be distinguished from effect. Effects or consequences, even if inevitable, are not necessarily the same as objects or purposes. c) Subjective intentions are not limited to conscious motives. d) Further, motives are not necessarily the same as objects or purposes. e) “Some” results or consequences are “so inevitably and inextricably involved” in an activity that, unless they are merely incidental, they must be a purpose for it. f) It is for the fact finding tribunal to determine the object or purpose sought to be achieved, and that question is not answered simply by asking the decision maker.”
“108. In the first place, I reject Mr Gardiner’s submissions based on the conceptual difference between exemption and relief. Such submissions seem to me to involve a degree of sophistication which runs entirely counter to the general approach to be adopted to the construction of the relevant statutory provisions, as finally laid down by the House of Lords in IRC v Joiner[1975] STC 657 ,[1975] 1 WLR 1701 ... 109. In my judgment, what the draftsman was manifestly trying to do when defining ‘tax advantage’ in s 709(1) was to cover every situation in which the position of the taxpayer vis-à-vis the Revenue is improved in consequence of the particular transaction or transactions. As I read s 709(1) the distinction between ‘relief’ and ‘repayment’ is not based on any conceptual difference between the two; the true interpretation of s 709(1) is in my judgment much simpler than that. In my judgment, ‘relief’ in s 709(1) is intended to cover situations where the taxpayer’s liability is reduced, leaving a smaller sum to be paid, and ‘repayment’ is intended to cover situations in which a payment is due from the Revenue. In the same way, the references to ‘increased relief’ and ‘increased repayment’ are directed at situations in which the taxpayer is otherwise entitled to a relief or repayment, with which the ‘relief’ or ‘repayment’ referred to in s 709(1) must be aggregated. 110. It follows that I respectfully agree with the observation of Aldous J in Sheppard and anor (Trustees of the Woodland Trust) v IRC (No 2)[1993] STC 240 that the words ‘tax advantage’ in the relevant statutory provision (Aldous J was concerned with s 466(1) of the 1970 Act: the forerunner of s 709(1)) presuppose that a better position has been achieved. However, I respectfully differ from him when he goes on to answer the question ‘An advantage over whom or what?’ by saying: ‘Advantage over persons of a similar class’ (see[1993] STC 240 at 253). In my judgment, the simple answer to that question is that a better position has been achieved vis-à-vis the Revenue. 111. On this issue, therefore, I would uphold the conclusions of the Special Commissioners and of the judge, holding that in consequence of the buy-backs the trustees obtained a ‘tax advantage’ within the meaning of the definition of that expression in s 709(1).”
“Cross J’s observations must be read in the context of the particular transaction which was in issue in that case. So read, they do not in my judgment raise any doubts as to the application of the Brebner principle.”
“Here there was only a single indivisible transaction and it was an ordinary commercial transaction, a simple purchase of debenture stock. As the purchaser was a dealer he was entitled to keep the interest element out of his tax return and so was able to pay a higher price than an ordinary taxpayer would have been able to pay. Similarly, a charity, because it would have been able to reclaim the tax, would have been able to pay an equally large price and still make a profit. But it is to my mind an abuse of language to say that the object of a dealer or a charity in entering into such a transaction is to obtain a tax advantage. When a trader buys goods for£20 and sells them for£30 , he intends to bring in the£20 as a deduction in computing his gross receipts for tax purposes. If one chooses to describe his right to deduct the£20 (very tendentiously be it said) as a “tax advantage” one may say that he intended from the first to secure this tax advantage. But it would be ridiculous to say that his object in entering into the transaction was to obtain this tax advantage. In the same way I do not think that one can fairly say that the object of a charity or a dealer in shares who buys a security with arrears of interest accruing on it, is to obtain a tax advantage, simply because the charity or the dealer in calculating the price which they are prepared to pay proceed on the footing that they will have the right which the law gives them either to recover the tax or to exclude the interest as the case may be.”
“53. The observations of Cross J call attention to the need when determining whether the obtaining of a tax advantage was a main object of an ordinary commercial transaction, to consider with care the significance to the taxpayer of the tax advantage. The tax advantage may not be a relevant factor in the decision to purchase or sell or in the decision to purchase or sell at a particular price. Obviously if the tax advantage is mere ‘icing on the cake’ it will not constitute a main object. Nor will it necessarily do so merely because it is a feature of the transaction or a relevant factor in the decision to buy or sell. The statutory criterion is that the tax advantage shall be more than relevant or indeed an object; it must be a main object. The question whether it is so is a question of fact for the commissioners in every case. Unless the commissioners misdirect themselves in law as to the test to be applied (as Cross J plainly thought was the case in Kleinwort) their decision cannot be challenged. It is plain that the commissioners correctly directed themselves in law in this case and that their decision was one which they could reasonably reach. I therefore do not think that invocation of the judgment of Cross J in Kleinwort assists the trustees.”
“(2) the June 2013 Memorandum sets out what the directors of each company wanted to achieve, both for themselves and for the other members of the Kwik-Fit Group. That group purpose (as set out in that memorandum) was to create net receivables within Speedy 1, to enable utilisation of the losses in Speedy 1, and tax deductions for the interest expense of each debtor. That outcome was considered to be good for the whole group;”
“In a sense it’s obvious because the point of the reorganisation is to put net interest income in Speedy 1’s hands because if it has more net interest income, it can use the trapped losses against that and then, of course, the debtor company that’s paying the increased interest, it gets the tax deduction. And that’s the idea, isn’t it; that’s the sense in which you’re accessing the losses?”