“Are you aware that all of the board members of [UK Ltd] are employees of ours? They are well informed on our intentions and, as a matter of fact, one is Joy Global’s CFO and a contributing architect of this plan. He is one of the two ‘senior management’ that is updated by Pat [i.e. Mr O’Brien] on a nightly basis.”
“Tax Planning Matrix - LeTourneau Acquisition - Estimated Tax Savings Using 5% interest rate As a follow up to today’s call, attached is the summary of the tax planning and ‘the math’ supporting estimated annual global tax savings which would inure to the benefit of our organization as long as the debt structure remains in place. Of course the actual tax savings will hinge on the interest rate that is used for the intercompany transactions. For now we are estimating the interest rate to be 5%.”
“I do not think we should include the ‘Tax Planning Matrix’ from Pat O’Brien … in this correspondence. Assuming Deloitte agrees I will ask that you please re-send this email without that attachment.”
“As you are aware, [the appellant] has been presented with the opportunity to acquire the shares of [LTT]. As you contemplate this opportunity, and the benefits this acquisition could provide to [the appellant], it is important that you consider this transaction on its own merits only and not give consideration to any broader benefits that may be derived by the group of the companies owned by Joy Technologies Inc.”
“(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 para 13(2) of Sch 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 para 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 IRC v Brebner[1967] 1 All ER 779 ,[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’. Lord Pearce concluded ([1967] 1 All ER 779 at 781,[1967] 2 AC 18 at 27) that ‘[t]he “object” which has to be considered is a subjective matter of intention’, and Lord Upjohn (with whom Lord Reid agreed) said ([1967] 1 All ER 779 at 784,[1967] 2 AC 18 at 30) that ‘the question whether one of the main objects is to obtain a tax advantage is subjective, that is, a matter of the intention of the parties’; and (iv) When determining what the company’s purposes were, it can be relevant to look at what use was made of the shares. As the Upper Tribunal (Barling J and Judge Charles Hellier) noted in Fidex Ltd v Revenue and Customs Comrs[2014] UKUT 454 (TCC) ,[2015] STC 702 (at [110]): ‘what you do with an asset may be evidence of your purpose in holding it, but it need not be determinative of that purpose. The benefits you hope to derive as a result of holding an asset may also evidence your purpose in holding it.’” ‘what you do with an asset may be evidence of your purpose in holding it, but it need not be determinative of that purpose. The benefits you hope to derive as a result of holding an asset may also evidence your purpose in holding it.’”
“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.”
“The parties were quite right not to dispute the fact that what matters is the company’s subjective purpose or purposes in being a party to the loan relationship in question. The purpose or purposes for which a company is a party to a loan relationship may or may not be the same as, for example, the purpose or purposes for which the company exists, or the purpose or purposes of a wider scheme or arrangements of which the loan relationship forms part. Those other purposes may, for example, encompass the purposes of other actors.”
“it is uncontroversial that what matters is the company’s subjective purpose or purposes in being a party to the loan relationship in question, and that for a corporate entity it is necessary to consider the subjective purpose of the relevant decision makers, generally the board of directors”
“(8) By the time Joy UK was informed of the 9-step Skinny on6 June 2011 , the decision to implement the Deloitte scheme was already taken by its US parent. The scheme was presented by O’Brien to Joy UK as ‘an acquisition that will provide Joy UK with some fairly substantial prospective tax savings’ (§42). (9) Despite the grave reservations of Joy UK as summarised by Willis’ jot-down list of concerns (§53), which included dividend block and rendering the reserves negative for the UK group of companies, there was no option for Joy UK but to go along with the decision to implement the scheme. Joy UK was fully aware of the scheme being ‘a more aggressive structure’ (§54) as acknowledged by Willis’ counterpart in the US. (10) The Doheny memo of16 June 2011 to the Board of Directors of [the appellant] was issued as directed by Tither of Deloitte UK (§50(1)) to give the impression that the directors were given leave ‘to make a fully informed decision to proceed with the acquisition’. (11) The withdrawal of O’Brien’s Tax Planning Matrix with its ‘math’ from the Board Pack was a gesture to remove the transparent record that securing the UK tax advantage was a driver for the decision to implement the Deloitte scheme that would involve the Appellant entering into the loan relationship by issuing the$550m loan notes. (12) The Board Meeting of [the appellant] convened on20 June 2011 was to impart a veneer of formality to suggest that genuine decision making had taken place at the UK level. The minutes for that board meeting was pre-drafted by Eversheds for adoption by the board, and Kisten and Mannion as the UK directors were to follow the lead from Olsen in the chair, who had been through the thinking process from the inception of the 9-step Skinny as the blueprint that would lead to the Appellant becoming party to the loan relationship.”
“From the above findings of fact, I conclude that there was no genuine decision making at the UK level as regards the resolution to issue the$550m loan notes to JTI. The decision makers were at JGI level, and their object in implementing the Deloitte scheme was to bring into existence the loan relationship of which the Appellant would be a party, thereby securing a UK tax advantage by generating the free-standing loan relationship debits for the UK members of the JGI group. Pursuant to subsection 442(5), that object was ‘a tax avoidance purpose’, and an ‘unallowable purpose’ in terms of section 441.”
“165. The Appellant relies on Olsen’s evidence to establish that there were business and/or commercial purposes for the issue of the loan notes of$550m . Olsen’s evidence in this respect was subject to extensive cross-examination. However, despite [counsel for HMRC’s] repeated questions from different angles to elicit the putative non-tax-advantage purposes for the Appellant being party to the loan relationship, I have found Olsen’s evidence to be vague, elusive, lacking in substance, contradictory to the factual matrix, and ultimately unconvincing. 166. For the Appellant, it was submitted that ‘overwhelmingly’, the only important factor in considering where to hold the acquisition was where to place and repay debt as the non-tax-advantage purpose. I can make no finding of fact to that effect, nor can I find any bona fide commercial or business purposes for the Appellant being party to the loan relationship. The negative condition under section 442(4) does not obtain, and the tax avoidance purpose that has been established in terms of section 442 means that the Appellant had an ‘unallowable purpose’ for being party to the loan relationship for the purposes of section 441.”
“Olsen said that the commercial reason to acquire LTT preceded the decision to place the debt in the UK. I accept that there was a bona fide commercial reason to acquire LTT, and the business case was eloquently set out in Project Longhorn by the Merrill Lynch on6 April 2011 …. However, as admitted by Olsen, the Appellant contributed nothing to the negotiation with Rowan [i.e. the seller of LTT] in closing the purchase of the LTT, or to the due diligence exercise in the interim period between6 April 2011 and13 May 2011 . Crucially, the sinews between the commercial case to acquire LTT by the group and the formation of the Appellant in order to be the ‘purchaser’ of LTT by assignment are absent to enable any finding of fact that the commercial case to acquire LTT could necessarily be extended to making the Appellant the purchaser, (which entailed the assumption of the loan from JTI) a commercial purpose without more.”
“179. From [counsel for the appellant’s] submissions, there is a suggestion that if the tax avoidance purpose is a main purpose and not the main purpose, then apportionment will have to follow. On the basis that I have found that to obtain the UK tax advantage was the main purpose for the Appellant being party to the loan relationship, no apportionment of the debit arising in each accounting period is in point. Even if I had found that to obtain the tax advantage was one of the main purposes, and not the main purpose for the Appellant being party to the loan relationship, the attribution issue would still be determined as wholly attributable to the unallowable purpose in line with Fidex [i.e. Fidex Ltd v Revenue and Customs Commissioners[2016] EWCA Civ 385 ;[2016] 4 All ER 1063 ]: but for the avoidance scheme encapsulated by the 9-step Skinny, there would have been no debit at all. 180. I conclude that the loan relationship debits were wholly attributable to an ‘unallowable purpose’ pursuant to section 441 CTA 2009, and there is no need for any just and reasonable apportionment to be applied.”
“(1) Are the existence of the company (here the appellant) and the loan relationship ‘givens’ in the analysis of the purpose for which the company is a party to the loan relationship? (2) Are commercial asset purchases bought with borrowing at arm’s length outside the scope of ss 441 and 442? (3) Is the use to which the proceeds of the borrowing are put … determinative?”
“In conclusion we reject the appellant’s three fundamental arguments on the statutory interpretation of ss441 and 442. That means: (1) A tribunal is able to, and should, look at all the facts and circumstances in determining the ‘main purpose for which the company is a party to the loan relationship….’. That consideration of purpose may include examining the reasons why that particular company (as opposed to another) was chosen to be a party to the loan relationship. That is because those reasons may inform the company’s purpose in being a party to the loan relationship. It is also because such reasons fall within the words ‘main purpose for which the company…is a party’ (while the loan relationship is referred to as being ‘of the company’ in s441(1) and s442(1), the wording of those provisions is such that the purposes in question need not necessarily be those exclusively of the company - see [37] above). (2) There is no rule that, as a matter of law, the unallowable purpose provisions are inapplicable to arm’s length finance costs for a commercial acquisition. (3) The use to which the borrowing is put is relevant to the purpose of the borrowing, but not determinative.”
“there is no indication in the statutory wording that when assessing the company’s purposes it will be irrelevant to consider the circumstances in which the company was chosen to enter into the relationship, or the parent company or group benefit-related reasons for that company entering into that relationship. That is not the same as saying another company, or ‘the group’s purpose’ is viewed as determinative. Rather, the other company’s / group’s perspective is relevant to the taxpayer company’s purpose because it informs the determination of the particular taxpayer company’s purpose.”
“In other words it did not necessarily follow, without evidence of why that was the case, that the group’s bona fide business reason for the acquisition meant there was the same bona fide commercial reason for why the appellant was made the purchaser of the acquisition. The question for the tribunal was the purpose for which the appellant was a party to the borrowing – it was open to the FTT to find that that was for purpose of securing the UK tax advantage.”
“139. The FTT sought to establish the appellant’s reasons for undertaking the borrowing. The appellant’s position was that its purpose was to acquire LTT; HMRC’s case was that that decision had already been made and there was no real possibility that the appellant would not make the same decision as JTI did (that the appellant should undertake the borrowing and did so for the same tax-motivated reasons). It is in that sense that the FTT considered that there was no genuine decision making. The reference to ‘genuine’ was perhaps not the most apposite term to capture what the FTT meant to express. The FTT was not saying the decision lacked validity or was ineffective in company law; nor that it was not formally possible for the appellant’s board to say ‘no’. Nor, accordingly, was it saying the decision-makers were wrong to think they were making a valid decision in accordance with their fiduciary duties as directors. All the FTT, we think, was seeking to convey was that the decision to acquire LTT using the appellant was effectively a ‘done deal’ and that there was no real possibility the appellant would not decide to acquire LTT. In addition, from a presentational point of view, the decision-making was depicted by others to look like the appellant was making a de novo decision to acquire LTT, in circumstances where it might realistically have said no, and with a view to giving the impression the decision was not for tax reasons. 140. The appellant’s submissions, that matters such as Mr Doheny’s exhortation to look at the matter from the appellant’s point of view, and the Tax Planning Matrix being pulled from the board pack, were irrelevant to the genuineness of the appellant’s decision, are thus misdirected. In our view, that might be right in terms of the narrow question of whether the decision was valid, but the matters were relevant to the wider question of whether, looking at all the facts, there was a real function to the appellant’s 20 June decision, beyond the appellant fulfilling its role in the Deloitte plan.”
“But its place in that structure was entirely driven by tax considerations, or, to use the language of the statute, in order to secure a tax advantage for other persons. That was what its participation in the structure was designed to achieve. In those circumstances if one asks what was its purpose in agreeing to the transactions, I do not think there is really any doubt that its purpose was to play the part that had been devised for it so as to obtain that advantage. As Falk LJ nicely puts it at [164] above, LLC5’s sole raison d'être was to enter into the Loans to obtain tax advantages for the BlackRock group. When the board were presented with the proposal that it should do just that, they no doubt had to satisfy themselves, as Mr Kushel said, that it was in the interests of LLC5 itself to enter into the transactions (and, as Falk LJ explains, in considering that question they quite rightly put out of their minds the tax advantages, which would accrue not to LLC5 but to other members of the group), but I do not think that means that there was no tax advantage purpose in LLC5 being a party to the Loans. That was why the board were asked to sign up to the transactions, and that was I think plainly why they did. That as Falk LJ says does not involve an attack on Mr Kushel's (or Mr Fleming’s) evidence; indeed I regard it as following from what Mr Kushel said.”
“I am of opinion that the Special Commissioners came to a reasonable conclusion on the evidence before them. They could have reached a contrary conclusion, which would have been equally unassailable, had they taken a different view of the evidence. But it was they who heard the witnesses, and I see no reason to suppose that their decision was not just and sensible.”
“My Lords, I would only conclude my speech by saying, when the question of carrying out a genuine commercial transaction, as this was, is reviewed, the fact that there are two ways of carrying it out - one by paying the maximum amount of tax, the other by paying no, or much less, tax - it would be quite wrong, as a necessary consequence, to draw the inference that, in adopting the latter course, one of the main objects is, for the purposes of the section, avoidance of tax. No commercial man in his senses is going to carry out a commercial transaction except upon the footing of paying the smallest amount of tax that he can. The question whether in fact one of the main objects was to avoid tax is one for the Special Commissioners to decide upon a consideration of all the relevant evidence before them and the proper inferences to be drawn from that evidence.”
“I should emphasise that my conclusion that LLC5 had a tax main purpose is a conclusion reached on the particular facts of this case. It does not follow that other debt incurred in connection with a commercial acquisition – as the acquisition of BGI US undoubtedly was – would fall foul of the unallowable purpose rule even if the decision to borrow had regard, as it often would, to tax considerations.”
“The ‘object’ which has to be considered is a subjective matter of intention. It cannot be narrowed down to a mere object of a company divorced from the directors who govern its policy or the shareholders who are concerned in and vote in favour of the resolutions for the increase and reduction of capital. For the company, as such, and apart from these, cannot form an intention. Thus the object is a subjective matter to be derived in this case from the intentions and acts of the various members of the group. and it would be quite unrealistic and not in accordance with the subsection to suppose that their object has to be ascertained in isolation at each step in the arrangements.”
“In the instant case, the directing minds were not confined to the three directors of the Appellant who were supposedly the decision makers approving the resolution that made [the appellant] a party to the loan relationship. As a corollary of the first guiding principle, the object of the directing minds necessarily included the key personnel who were directing the affairs of JGI and JTI in relation to the interconnected transactions in the 9-step ‘Skinny’, which had come to assume an organisational status as being an integral group plan encompassing Step 6.”
“In our view, both guiding principles effectively amounted to the FTT saying it should not restrict itself to looking simply at the loan relationship or what the directors said about their purposes in isolation but rather ascertain the purpose for which the company was a party to the loan relationship with the benefit of facts from the wider context of the company’s borrowing. The FTT was correct to adopt that approach.”
“[179] I agree with Mr Prosser that what the legislation requires is a just and reasonable apportionment by reference to the relevant purposes. Those purposes are identified using a subjective approach …. The statutory test requires the identification and disallowance of ‘so much of’ any debit that is ‘attributable’ to the unallowable purpose: s 441(3). That is the enquiry that the tribunal must undertake. While the determination of a just and reasonable apportionment is an objective exercise, it is not necessarily the same as the consideration of ‘all the facts and circumstances’ referred to by the UT, if by that the UT did not intend to have regard to the requirement to apportion by reference to the relevant purposes. The framework for the apportionment is the purposes that have been identified by the fact-finding tribunal. Subject to that point, however, I agree that all relevant facts and circumstances should be considered. [180] The position is straightforward if all the debits, or perhaps a defined part of them, are properly attributable solely to a tax avoidance main purpose. Conversely, if they are properly attributable to a purpose which is not an unallowable purpose then there will be no disallowance under s 441. Where debits are attributable to more than one purpose then an apportionment is required. As to the precise mechanism by which this is done, the legislation is not prescriptive. The answer to that question will inevitably be fact specific.”
“Even if I had found that to obtain the tax advantage was one of the main purposes, and not the main purpose for the Appellant being party to the loan relationship, the attribution issue would still be determined as wholly attributable to the unallowable purpose in line with Fidex: but for the avoidance scheme encapsulated by the 9-step Skinny, there would have been no debit at all.”
“(i) the commercial purpose of having a right to the cash flows they generated; (ii) the purpose of furthering its policy of conducting an orderly disposal of its whole bond portfolio; and (iii) the tax avoidance purpose inherent in Project Zephyr.”
“The UT was required to assess how much of the debit was, on a just and reasonable apportionment, attributable to the unallowable purpose for which the bonds were held. I am content to assume that Fidex would have held the bonds from the start of 2005 irrespective of the unallowable purpose but that is nothing to the point. The question is whether and to what extent the debit was attributable to the unallowable purpose for which they were held. I agree with the UT that the answer to this question is quite clear. The debit arose from and was entirely attributable to Project Zephyr. But for this tax avoidance scheme there would have been no debit at all.”