Company Permitted to Appeal Against Denial of Loan Deductions

Rule 22 of the Tribunal Procedure (Upper Tribunal) Rules 2008 provides that, where the Upper Tribunal (UT) refuses permission to appeal against a decision of the First-tier Tribunal (FTT) or gives only limited permission, it must give reasons for its decision. Recently, the UT granted a company limited permission to appeal against a decision that its sole purpose in entering into a loan was to secure Corporation Tax deductions on the interest payable on it.

The company had acquired the share capital of another group company as part of a reorganisation of the group's UK subsidiaries. The acquisition was partly funded by a loan of $950 million from a related company based in the Netherlands. The company claimed Corporation Tax deductions in respect of the interest on the loan. HM Revenue and Customs (HMRC) denied the deductions on the basis that the company's main purpose of being a party to the loan was an 'unallowable purpose' within the meaning of Section 442 of the Corporation Tax Act 2009. The FTT refused the company's appeal against HMRC's decision, finding that the sole purpose of entering into the loan was to secure the interest deductions.

Ruling on the company's application for permission to appeal against the FTT's decision, the UT granted permission on three grounds. The FTT had rejected the evidence of a director of the company that it had had a main purpose of acquiring a good investment, despite that evidence being unchallenged. It had concluded that the company had had the objective of avoiding a bad investment, rather than making a good investment, without putting that point to the director. Those were errors of law that were material to the decision. Furthermore, the FTT's finding that making a good investment was not a main purpose of entering into the loan was not one it had been entitled to make on the evidence.

However, the UT refused permission to appeal on the ground that the FTT had erred in rejecting explanations given by the group's senior tax manager of correspondence that focused on the tax aspects of the acquisition. While the FTT had erred in law, this would not have made any difference to the outcome, given the other evidence that the FTT had carefully considered and weighed.

The company also contended that the FTT had erred in rejecting the tax manager's evidence that the group reorganisation would have happened in any event. Refusing permission to appeal on that ground, the UT noted that the issue was whether the company had had an unallowable purpose when it took out the loan used to fund the acquisition. The tax manager's evidence was about what would have happened had the acquisition not taken place. It was not evidence about the purpose of the loan.

The FTT had also found that the group reorganisation was not a main purpose of taking out the loan. That finding was based on a careful evaluation of the evidence and was plainly capable of being rationally or reasonably justified. There was no error of law and permission to appeal on that ground was also refused.