CFM38140 - Loan relationships: tax avoidance: unallowable purpose: a main tax avoidance purpose: the meaning of tax advantage

CTA09/S442(5), S476(1)

For the part of the unallowable purpose rule (at S441-442) that deals with a main tax avoidance purpose, it is necessary to identify if there is a ‘tax avoidance purpose’, that is, a purpose which consists of securing a tax advantage, either for the company or any other person, which in turn requires determining whether there is a tax advantage.

Tax advantage

Further to S476(1), tax advantage takes its meaning from CTA10/S1139. It includes:

  • a relief from tax or increased relief from tax (S1139(2)(a))
  • a repayment of tax or increased repayment of tax (S1139(2)(b))
  • the avoidance or reduction of a charge to tax or an assessment to tax (S1139(2)(c))
  • the avoidance of a possible assessment to tax (S1139(2)(d))

where tax is Income tax or Corporation Tax (CTA2010/S1119).

It also includes the avoidance or reduction of a charge under various other UK provisions, for instance, in relation to the bank levy.

In particular, this definition means that tax advantage always refers to UK tax – non-UK tax benefits are not covered.

The leading authorities on the meaning of tax advantage generally are Inland Revenue Commissioners v Trustees of the Sema Group Pension Scheme [2003] EWCA Civ 1857 (IRC v Sema) and Commissioners of Inland Revenue v Parker [1966] AC 141 (IRC v Parker).

IRC v Sema

The case involved a share buyback by a quoted company from a pension scheme, in which the availability of the tax credit was challenged under the transactions in securities legislation. In the decision, at paragraph 109, Lord Justice Parker said, in relation to the part of S709(1) that corresponded to S1139(2)(a) and (b):

“In my judgment, what the draftsman was manifestly trying to do when defining ‘‘tax advantage’’ in s709(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.”

IRC v Parker

In IRC v Parker, Lord Wilberforce held, at page 415, that the definition of tax advantage, in relation to the part of S709(1) that corresponds to S1139(2)(c) and (d):

“presupposes a situation in which an assessment to tax, or increased tax, either is made or may possibly be made, that the taxpayer is in a position to resist the assessment by saying that the way in which he received what it is sought to be taxed prevents him from being taxed on it, and that the Crown is in a position to reply that if he had received what it is sought to tax in another way he would have had to bear tax. In other words, there must be a contrast as regards the ‘receipts’ between the actual case where these accrue in a non-taxable way with a possible accruer in a taxable way, and unless this contrast exists the existence of the advantage is not established.”

This is often referred to as the Wilberforce test or comparator, and may be relevant where the existence of a tax advantage other than under S1139(2)(a) or (b) is being considered.

Application in unallowable purpose rule cases

There is nothing in the context of S441-442 that suggests a different conclusion from that reached in IRC v Sema and accordingly all that is required for there to be a tax advantage for the purposes of S1139(2)(a) is for the taxpayer to have improved its tax position as a result of a transaction, for instance by deductible loan relationship debits.

This analysis was confirmed in Oxford Instruments UK 2013 Ltd v HMRC [2019] UKFTT 0254 by Judge Beare. He noted, at paragraph 111:

“…[even i]n a case where that net neutral or net positive tax position arises as a result of both the generation of income and the generation of deductions, the deductions are still reliefs from tax pursuant to which the amount of income giving rise to tax is reduced.”

This question of what constitutes a tax advantage has also arisen in several of the cases being litigated at the time of writing, for instance in Kwik-Fit Group Ltd and other companies v Revenue and Customs Commissioners [2022] UKUT 314 (Kwik-Fit v HMRC), which support the view above.