“147 Tax calculations to be based on arm's length, not actual, provision (1) For the purposes of this section “the basic pre-condition” is that— (a) provision (“the actual provision”) has been made or imposed as between any two persons (“the affected persons”) by means of a transaction or series of transactions, (b) the participation condition is met (see section 148), (c) the actual provision is not within subsection (7) (oil transactions), and (d) the actual provision differs from the provision (“the arm's length provision”) which would have been made as between independent enterprises. (2) Subsection (3) applies if— (a) the basic pre-condition is met, and (b) the actual provision confers a potential advantage in relation to United Kingdom taxation on one of the affected persons. (3) The profits and losses of the potentially advantaged 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… …” [Emphasis Added]
“[The predecessor of s.147(1)] speaks of provision between two persons. For the [legislation] to apply those two persons must be identified. Whilst the transaction or series of transactions by which the relevant provision is made or imposed may encompass transactions between persons other than those two persons, the identified provision must be between two persons only. There is, in our view, no scope for reading 'two' as 'two or more'.”
“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.” (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 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.” (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, (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 special relationship, and the fact that it is not part of L's business to make loans generally is to be disregarded in applying subsection (2). (b) whether it might be expected that the issuing company and a particular person would have become parties to a transaction involving— (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.”
“155 “Potential advantage” in relation to United Kingdom taxation (1) Subsection (2) applies for the purposes of this Part. (2) The actual provision confers a potential advantage on a person in relation to United Kingdom taxation wherever, disregarding this Part, the effect of making or imposing the actual provision, instead of the arm’s length provision, would be one or both of Effects A and B. (3) Effect A is that a smaller amount (which may be nil) would be taken for tax purposes to be the amount of the person’s profits for any chargeable period. (4) Effect B is that a larger amount (or, if there would not otherwise have been losses, any amount of more than nil) would be taken for tax purposes to be the amount for any chargeable period of any losses of the person…” (2) The actual provision confers a potential advantage on a person in relation to United Kingdom taxation wherever, disregarding this Part, the effect of making or imposing the actual provision, instead of the arm’s length provision, would be one or both of Effects A and B. (3) Effect A is that a smaller amount (which may be nil) would be taken for tax purposes to be the amount of the person’s profits for any chargeable period. (4) Effect B is that a larger amount (or, if there would not otherwise have been losses, any amount of more than nil) would be taken for tax purposes to be the amount for any chargeable period of any losses of the person…”
“[77] Both the Joint Statement and the Gaysford Statement There were two versions of the experts’ joint statement before the FTT with the difference between them being that the statement signed by Mr Gaysford referred to an area of dispute between them as to the scope of the issues on which they were granted permission to serve expert evidence. record that 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.”
“[89] It is clear from the evidence of the experts that the transaction that was actually entered into would not have taken place in an arm’s length transaction with an independent lender. It is therefore necessary to hypothesise a different transaction which independent enterprises would have entered into and, as it is for LLC5 to displace the closure notice and amendment made to its self-assessment, it can only succeed on the transfer pricing issue by positively establishing that there is a hypothetical transaction in which a hypothetical independent enterprise would lend$4 billion dollars to LLC5.”
“…conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reasons of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.”
“…arm’s length principle follows the approach of treating the members of [MNE, a multinational enterprise] group as operating as separate entities rather than as inseparable parts of a single unified business. Because the separate entity approach treats the members of an MNE group as if they were independent enterprises, attention is focused on the nature of the transactions between those members and on whether the conditions thereof differ from the conditions that would be obtained in comparable uncontrolled transactions. Such an analysis …is at the heart of the application of the arm’s length principle. [emphasis added]”
“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 the Appellant 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 the Appellant 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 LLC5 - with the explicit consent of LLC4 – to effectively ratify the legal and financial position to which the Appellant was entitled, that is the receipt of the value from BGI US. This ratification would most likely have been effected via inter-company agreements and covenants which would have formed part of the Appellant'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 it would have been costly and complex to do so. Mr Ashley believes it would have been straightforward and that the associated 'cost' would have been an 'opportunity cost' (i.e. 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 transaction within a group. h. The experts cannot say with certainty whether all of the possible additional clauses listed on 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 in debt transactions, including the BlackRock Group’s 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.”
‘However, I would note that neither of the experts had been instructed to consider this alternative hypothetical transaction. Mr Ashley, in evidence, said that in his experience he had neither “considered” or “come across” such a transaction. Mr Gaysford, whose evidence on this issue was not challenged in cross-examination, identified “several problems” with such a scenario. First, in carrying over that set of economic circumstances other economic circumstances of the actual transaction are lost; second, the ‘step plan’ or “wider delineation of the transaction” is “very sensitive” to a lot of “different moving parts” including the US tax position, the OCC and the flexibility that the BlackRock Group has to move funds around its group for “perfectly acceptable” commercial reasons; third the independent lender, “if it is now part of the structure” would be required to sign up to the capital and liquidity arrangements which Mr Gaysford described as a “significant” obligation; and finally, a “methodological point” that if the independent lender owned the common shares of LLC6 Mr Gaysford said he would “struggle” to see how that lender was “now independent”.’
“15. EY had been given, what Mr Fleming described as, a “very broad remit” to consider the whole structure of the acquisition of BGI taking into account a wide range of options. Mr Fleming understood that EY had initially suggested that BGI should be acquired through a UK resident entity taking on intercompany debt to take advantage of the “generous tax regime for interest deductions” operating at that time. He explained that he was already aware of the concept of including a UK resident entity in an otherwise US resident holding structure having previously discussed the possibility with HMRC and the then Financial Secretary to the Treasury, Stephen Timms MP, in connection with the “worldwide debt cap” rules subsequently introduced by Part 7 of TIOPA to limit the extent to which UK tax deductions can be claimed for finance expenses incurred on loan relationships entered into between group companies. 16. However, rather than a UK limited company the decision was taken “relatively quickly” for BGI to be acquired by a US limited liability company (“LLC”) that was UK resident………”
‘18. In an email dated24 July 2009 to John D Hamilton, of BlackRock’s Corporate Tax Group New York whose responsibility included international tax globally including for the USA, Mr Fleming wrote: “JD as discussed some thoughts and talking points on the use of a US LLC resident for UK tax purposes in the UK, to acquire non-UK companies such as the US bank [ie BGI] … Risk Rating Issues HMRC will likely view the transaction as being aggressive, which may lead them to: (1) revisit our low risk rating; (2) seek other issues to challenge us on; (3) seek every means possible to challenge the structure itself including: - a more difficult thin cap negotiation. - Para 13 (generally accepted to be toothless, but will need to ensure we don’t create adverse evidence of intent. … Law Change Risk – I am somewhat wary that a “super-para 13” rule might get introduced (better grafted than toothless para 13). This was shelved by HMT/HMRC at the beginning of this year, but may come back on the table in coming years. This means that getting an arb clearance (where HMRC would have accepted that the allowed debt did not have a UK tax avoidance purpose) might be very valuable in the future.” 19. As is apparent from the email, Mr Fleming had some reservations as to how HMRC might regard the transaction. He explained that the reference to “para 13” in the email was to paragraph 13 of Schedule 9 to theFinance Act 1996 (nows 441 of Corporation Tax Act 2009 ). As for it being “toothless” Mr Fleming explained that it was generally accepted that paragraph 13 was intended to apply to situations where loan relationships were entered into specifically for the purpose of generating tax deductible finance expenses without any other commercial purpose, and that it was not intended to apply in situations where the debt was used to finance a bona fide commercial transaction. He considered that the accepted view was that if the borrowing party to a loan relationship was using the funds raised from the loan relationship for a commercial purpose, that commercial purpose, and not any related tax considerations, was taken as the main purpose for entering into the loan relationship for the purpose of applying paragraph 13. 20. Mr Fleming also explained that by “super-para 13” he was referring to a possible extension of the scope of paragraph 13 to include the situation where a taxpayer used borrowed funds to make a bona fide commercial investment but whose decision to take on the debt might have been influenced by tax considerations which could be considered to be a “main purpose” for entering into the loan relationship notwithstanding the genuinely commercial use of the funds raised. Such a possibility had been raised by a Treasury/HMRC document, The Taxation of Foreign Profits of Companies dated21 June 2007 and discussed in the10 September 2007 edition of the Tax Journal. However, the proposal was not implemented.’
‘34. On13 October 2009 Fletcher Clark, of BlackRock’s Legal Department, asked Mr Fleming to provide a briefing note to be shared with Colin Thomson (Head of BlackRock’s Financial Reporting Group for the international business), Roger Tooze (Head of BlackRock’s Business Finance) and James DesMarais (General Counsel for BlackRock’s international business) as potential members of the LLC5 Board. Mr Fleming provided the following note on26 October 2009 : “Fletcher, the purpose of the LLC[5] is to effect the acquisition of the BGI US business from Barclays. Ideally, we would have wished LLC5 to be a UK incorporated company, but, this was not possible for both US and UK tax and regulatory reasons. On that basis, it became necessary for the entity to be formed as a US LLC since (1) an LLC is a US entity and thus likely to be acceptable to the OCC, and (2) it is also transparent for US tax purposes. However, this means that the LLC must have its central management and control located in the UK. I am sure that Jim [DesMarais], Colin [Thomson] and Roger [Tooze] are all familiar with the residency policy that Tax has imposed in order to ensure that our non-UK funds and group companies are not UK resident. What we need to do with LLC5 is reverse that and ensure that all activities (that we would normally ensure are conducted outside the UK) are in fact done in the UK. On that basis, we must ensure that the central management and control of the entity is conducted in the UK, and is done through the medium of board meetings, which we will hold on a regular basis. The business of LLC5 will be relatively simple. It will hold preference shares in LLC6 which will only provide for 10% voting control. Accordingly, it will not be in a position to manage any of the underlying US business activities, nor will it be called upon to do so. Rather, it will be required to consider its own business of making and managing passive investments and managing its commitments in terms of issuing a Eurobond (that will be listed on the Cayman Exchange) in order to finance the acquisition. Thus, it will consider the likelihood that the business conditions pertaining in the US subsidiaries will enable the preference share dividends to be met, in order to meet its own financing costs. Let me know if you think it will be helpful for me to directly brief Jim, Colin and Roger on the specific transactions that LLC5 will conduct, but hopefully these will already be quite clear on the step plan. Please let me know when the first board meeting is scheduled, so we can work together on the agenda. We need to get this conducted asap.”’
‘36. Also on10 November 2009 , Mr Fleming met with Mr Thomson, Mr Tooze and Mr DesMarais to discuss and answer any questions that they might have ahead of the LLC5 Board meeting. He explained that within the BlackRock Group it was common practice for the Corporate Tax Group to brief members of relevant group entity boards with details of any capital transactions that those boards were being asked to enter into. He recalled that the “main focus” of these discussions was to enable him to explain the UK tax rules around deductions for interest expenses. … 38. However, it was important, he said, that the members of any affected board were fully briefed and content that the proposed transaction was acceptable in financial, regulatory and governance terms from an entity level perspective. He explained that this was because one of the purposes of Corporate Tax Group team members from the US and the UK working on the proposal was to ensure that any potential UK regulatory or governance issues that may not have been identified by the internal stakeholders in the US were picked up and taken into account when shaping the transaction. Mr Fleming recalled that the main focus of the discussions on10 November 2009 had been to explain how the UK tax rules around deductions for interest expenses worked to reassure those present of the “solidity of the tax analysis” and had “mirrored” to a large extent the discussions that he had himself had with the EY Tax Partner advising the BlackRock Group in relation to the BGI acquisition in July 2009. 39. On12 November 2009 Mr Clark advised Mr Fleming by email that Mr Kushel, Mr Thomson, Mr Tooze and Mr DesMarais had agreed to join the LLC5 Board. The email also noted that Mr Kushel would “come off the board after closing”.’
‘44. As noted in the SOAF the board meeting took place on30 November 2009 . The minutes record that the meeting was attended by Mr Kushel, who took the chair, Mr Thomson, Mr DesMarais and Mr Tooze. The meeting was also attended by Adrian Dyke the company secretary and Mr Fleming who was there to explain the role of LLC5 in the proposed acquisition of BGI. … 46. In addition to his position with LLC5, in 2009 Mr Kushel was also chairman of a number of companies in the BlackRock Group…’
‘49. He considered his role as a board member was to be satisfied that a transaction was in the best interests of the entity concerned and did not see it as part of his remit to begin to question or suggest changes to the underlying capital structure that a proposed transaction should follow. Although expressed in general terms Mr Kushel confirmed that he, and he thought all the board members, adopted such an approach in relation to LLC5. Although, in evidence Mr Kushel used the term “we” to describe the actions of the LLC5 Board he accepted that he was only giving evidence on his behalf and could not say what was in the minds of the other board members when the decision were taken. 50. Mr Fleming recalled that the meeting took place “around about lunchtime” and lasted approximately 45 minutes and that the discussion on the tax aspects took place at the beginning of the meeting and “was not very long”. He explained that the meeting was “considerably longer” than the typical board meetings for holding companies within the group but “by no means as long” as the board meetings held for operating companies which he said could “run for many hours, or indeed days.” 51. Mr Fleming stressed that those attending the meeting were not doing so “in a vacuum”, there had already been discussions with the business finance team and the financial reporting team. However, Mr Fleming did confirm that there had been no discussion of alternative investments. He explained that this was because, at the date of the meeting, they were “days before the execution of a very complex multi-jurisdictional transaction for which a detailed ‘step plan’ had been prepared which we were to follow”. Provided the board felt the transaction was commercially advantageous for the company it “would not have been sensible or open to the directors to consider an alternative transaction.” 52. Although Mr Kushel said that there was “a chance” that he would vote against LLC5’s proposed transaction at the meeting he explained that having been involved in the step plan and various elements reviewing the transaction he felt “comfortable” with it and had no concerns over its commercial viability. As such, “unless one of the advisors during the presentation had brought out new information not previously circulated” or consistent with his understanding of the transaction, this was unlikely. He also said that he had considered whether to proceed with the transaction without taking any UK tax advantage into account and although he could not now recall the details of the board meeting he had no reason to think that he would have acted contrary to Mr Fleming’s advice, as recorded in the minutes of the meeting, that, “having noted that the Company itself would gain no benefit from a UK tax deduction for the interest” as it was group policy for such interests to be surrendered between group affiliates for no payment: “… it was necessary for the transaction to be considered by the board and viable for the Company without taking any UK tax advantage into account.” 53. Mr Kushel also said that if the anticipated tax benefits of structuring the acquisition 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.’
‘In addition to these documents the following documents were tabled at the LLC5 Board meeting on30 November 2009 : (1) a copy of the Project Onyx Step Plan, dated20 November 2009 , as prepared by EY. In evidence Mr Fleming described this as being “the roadmap for the lawyers and everybody involved in the transaction to implement it”; (5). an Opinion on the anticipated tax treatment of the proposed transaction from Kevin Prosser QC.’
‘1. CHAIRMAN AND QUORUM Mr Kushel took the chair. The Chairman announced that a quorum was present and that due notice of the meeting had been given to all managers and referred the Board to the materials distributed to the Board prior to the Meeting (the "Board Materials") and called the Meeting to order. 2. PROPOSED TRANSACTIONS The Chairman noted that the Company's ultimate parent company, BlackRock, Inc., a Delaware corporation ("BRI"), entered into a stock purchase agreement on June 16, 2009 (as may be amended, amended and restated or otherwise supplemented from time to time) to acquire the Barclays Global Investors business from Barclays PLC (the "Acquisition"). The Chairman proposed that the Company enter into a series of transactions in accordance with the Project Onyx Closing Step Plan (the "Step Plan") prepared by Ernst & Young LLP, a copy of which is attached hereto as Exhibit A, and other transactions not included in the Step Plan by which the Acquisition will be effectuated. … 3. REVIEW OF STEP PLAN AND COMPANY’
“117. As a company is a legal construct, as is clear from Oxford Instruments, its intentions are, in the absence of evidence that they are acting as a puppet, being usurped or by-passed in the decision making process, those of its directors. In the present case there is nothing to suggest that, despite their significant involvement in the creation and advice on the implementation of the transaction, LLC5 ceded control to its advisers or other parts of the BlackRock Group. As such it is necessary to ascertain the subjective intentions and purpose of LLC5’s directors in respect of the transaction.”
“Profits and deficits arising to a company from its loan relationships are to be calculated using the credits and debits given by this Part.”
“Introduction 440 Overview of Chapter (1) This Chapter contains rules connected with tax avoidance. (2) In particular— (a) for rules about unallowable purposes and tax relief schemes and arrangements, see sections 441 to 443, …” (a) for rules about unallowable purposes and tax relief schemes and arrangements, see sections 441 to 443, …”
“Unallowable purposes and tax relief schemes 441 Loan relationships for unallowable purposes (1) This section applies if in any accounting period a loan relationship of a company has an unallowable purpose. … (3) The company may not bring into account for that period for the purposes of this Part so much of any debit in respect of that relationship as on a just and reasonable apportionment is attributable to the unallowable purpose. … (6) For the meaning of “has an unallowable purpose” and “the unallowable purpose” in this section, see section 442.”
“442 Meaning of ‘unallowable purpose’ (1) For the purposes of section 441 a loan relationship of a company has an unallowable purpose in an accounting period if, at times during that period, the purposes for which the company— (a) is a party to the relationship, or (b) enters into transactions which are related transactions by reference to it, include a purpose (“the unallowable purpose”) which is not amongst the business or other commercial purposes of the company. (2) If a company is not within the charge to corporation tax in respect of a part of its activities, for the purposes of this section the business and other commercial purposes of the company do not include the purposes of that part. (3) Subsection (4) applies if a tax avoidance purpose is one of the purposes for which a company— (a) is a party to a loan relationship at any time, or (b) enters into a transaction which is a related transaction by reference to a loan relationship of the company. (4) For the purposes of subsection (1) the tax avoidance purpose is only regarded as a business or other commercial purpose of the company if it is not— (a) the main purpose for which the company is a party to the loan relationship or, as the case may be, enters into the related transaction, or (b) one of the main purposes for which it is or does so. (5) The references in subsections (3) and (4) to a tax avoidance purpose are references to any purpose which consists of securing a tax advantage for the company or any other person.” [Emphasis Added]
“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”. 42.In the present case, as Mr Peacock stressed, there was evidence before the FTT from Mr Turner as to the purposes for which TDS held its LGI shares. This sought to distinguish TDS's reasons for proceeding with the Swap (and the Novations) from its purposes in holding the LGI shares. Thus, Mr Turner said in his witness statement: "As I will explain below, whatever the main purpose or purposes of the [Swap] and loan novations, the only purpose of TDS in holding the shares in LGI was, is and always has been for bona fide commercial reasons. … It has never been suggested that LGI was anything other than an ordinary subsidiary of TDS. In fact, HMRC have accepted, at least up until the events with which this appeal is concerned, that TDS held the shares in LGI for bona fide commercial reasons alone. Nothing changed in that respect when the Group decided to enter into the [Swap] – at no point did TDS consider disposing of its shares in LGI and so at no point did it consciously formulate any other purpose for holding the shares." 43.These passages were not the subject of any direct challenge when Mr Turner was cross-examined. That being so, Mr Peacock submitted that it was not open to HMRC to contend, or to the FTT to find, that TDS had held the LGI shares for a "unallowable purpose". … 44.The principle that a witness's evidence should be challenged in cross-examination if the Court is to be asked to disbelieve him is plainly very important. In cases in which HMRC wish to contend that a company had a tax avoidance motivation in the face of evidence along the lines of that given by Mr Turner, it will always be wise, and must commonly be vital, to raise the issue in terms with the witness. It would, I think, have been better if the parts of Mr Turner's witness statement that I have quoted had been the subject of specific cross-examination. 45.In the particular circumstances of this case, however, I do not think that the absence of such a challenge precluded a finding of "unallowable purpose". Mr Peacock accepted that his objection would not avail him if we concluded, as I do, that it followed inevitably from the FTT's findings that securing a tax advantage must have been a main purpose for which TDS held the LGI shares during the relevant period. More than that, it seems to me that the FTT did not need to disbelieve Mr Turner to decide that TDS had an "unallowable purpose" for holding its LGI shares. 46.Mr Turner's witness statement brought out the fact that TDS owned its LGI shares long before the Swap and Novations were thought of and that it continued to have ordinary business reasons for doing so. On the other hand, Mr Turner did not dispute that the Swap and Novations had as a main purpose securing a very large tax advantage that depended on TDS holding the LGI shares. While, therefore, there is no question of TDS having had the tax advantage in mind when it acquired the shares, it was evidently intending to use them in the tax avoidance scheme during the currency of the Swap. Had the tax advantage in view been small, there might have been scope for argument as to whether an intention to use the shares to achieve it implied that obtaining the advantage was now a main purpose of holding the shares. In fact, however, the hoped-for gain was large both in absolute terms (more than£70 million ) and relative to the apparent value of TDS (some£280 million ). That being so, I agree with Mr Ghosh that the inescapable inference was that securing the advantage had become a main purpose of holding the shares. The prospective advantage was of such significance in the context that gaining it must have become a main purpose of holding the shares as well as of the Swap and Novations. 47.That conclusion is not, however, inconsistent with Mr Turner having considered, perfectly honestly, that TDS's "purpose" in holding the LGI shares was exclusively commercial. …” [Emphasis Added]
“18. An appeal to this tribunal lies only on a point of law:section 11(1) of the Tribunals, Courts and Enforcement Act 2007 (“TCEA 2007”). While there cannot be an appeal on a pure question of fact which is decided by the FTT, the FTT may arrive at a finding of fact in a way which discloses an error of law. That is clear from Edwards v Bairstow[1956] AC 14 . In that case, Viscount Simonds referred to making a finding without any evidence or upon a view of the facts which could not be reasonably entertained, and Lord Radcliffe described as errors of law cases where there was no evidence to support a finding, or where the evidence contradicted the finding or where the only reasonable conclusion contradicted the finding. Lord Diplock has described this ground of challenge as “irrationality”
“Appellate courts have been repeatedly warned, by recent cases at the highest level, not to interfere with findings of fact by trial judges, unless compelled to do so. This applies not only to findings of primary fact, but also to the evaluation of those facts and to inferences to be drawn from them.”
“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.”
‘[119]…Also, Mr Kushel said that as he was comfortable with it and had not 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….’
‘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.’
‘The business of LLC5 will be relatively simple. It will hold preference shares in LLC6 which will only provide for 10% voting control. Accordingly, it will not be in a position to manage any of the underlying US business activities, nor will it be called upon to do so. Rather, it will be required to consider its own business of making and managing passive investments.’
‘39. I have been asked to comment on what I understood to be the ‘purpose’ of LLC5 generally and also the purpose of the LLC5 Board in approving the transactions presented to it on30 November 2009 . 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…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….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 in finance the acquisition. 41. 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……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.’
“The evidence of a conscious professional purpose did not displace the inference that there was another subconscious non-professional purpose. When the expenditure is on an everyday item such as clothing, and the pattern of use is consistent and well-established, it is easy as a matter of common sense to infer the taxpayer’s purpose without relying on any active mental process. The general purpose of clothing is taken for granted and no conscious thought is given to it. It did not cross the taxpayer’s conscious mind that she was going to be warm, clothed and decent when she laid out money on those clothes.”
“Of course Miss Mallalieu thought only of the requirements of her profession…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.”
“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.”
“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[1997] STC 734 at 743 (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.”
“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.”
‘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 should be apportioned to the commercial main purpose...’