Special rules apply to prevent a company from claiming tax relief for interest paid and other debits relating to loans it entered into for an unallowable purpose (s421 and 422, Corporation Tax Act 2009).  

An unallowable purpose is a purpose that “is not amongst the business or other commercial purposes of the company”. This includes a tax avoidance purpose where that is the main, or one of the main purposes why the company entered into the loan relationship. 

The Court of Appeal recently considered the application of the unallowable purpose rule in three separate cases: 

• BlackRock Holdco 5 LLC v HMRC [2024] EWCA Civ 330.
• Kwik-Fit Group Ltd and other companies v HMRC [2024] EWCA Civ 434.
• JTI Acquisitions Company (2011) Ltd v HMRC [2024] EWCA Civ 652. 

HMRC has recently written to companies where it believes that the principles derived from the above cases are relevant to an enquiry it had opened. HMRC expects to issue further letters later in the year as other cases progress.  

In the letter, HMRC invites the company to consider its position in the light of those decisions and to discuss the matter with HMRC so that it can be resolved. HMRC says that the discussions “could be conducted on a without prejudice basis”. 

The letter includes a summary of some of the key points arising from the decisions  identified by HMRC. These include “the importance of testing the asserted purposes of the loan relationship against the evidence, especially the contemporaneous documentary evidence”. HMRC says that it will follow the approach of the Court of Appeal in the above decisions, by considering “all the evidence to reach a realistic view of the purposes of the company entering into a loan relationship”. 

HMRC has updated its guidance starting at CFM38100 for the decisions. This includes adding CFM38167, which explains the facts and the decision reached by the Court of Appeal in each of the cases. HMRC’s approach to enquiries is set out at CFM38200. 

HMRC says that it will “continue to investigate and challenge cases” where it believes “the facts, circumstances and evidence” show that the unallowable purpose rule applies.