CFM38175 - Loan relationships: tax avoidance: unallowable purpose: application: general

CTA09/S441-442

Applying the unallowable purpose rule

The application of the unallowable purpose rule (at S441-442) is a matter for careful judgement, and was referred to by the then Economic Secretary when the earlier version of the rule went through report stage. Her comments are recorded in Hansard and reproduced in full at CFM38180.

It can be seen that those comments were primarily concerned with the tax avoidance purpose test in what is now CTA09/S442(3)-(4), although brief reference is made to S442(2) in the last two sentences of the second paragraph.

HMRC’s original guidance said:

“You will note from the Economic Secretary’s comments that S441-442

  • will normally apply where UK branches of overseas companies borrow for overseas activities outside the UK tax net
  • will not normally apply where a company borrows to acquire shares in companies, whether in the United Kingdom or overseas, or to pay dividends, provided that the borrowings are not structured in an artificial way. And a similar view is taken as regards borrowings, whether from a third party or intra group, to acquire other business assets whether located in the United Kingdom or overseas. This approach is not affected by the substantial shareholdings rules
  • will not normally apply where a company is choosing between different ways of arranging its commercial affairs, if it chooses the course that gives a favourable tax outcome, provided that tax avoidance is not the object, or one of the main objects, of the arrangements.”

Since the Economic Secretary’s comments were made and HMRC’s original guidance was published, HMRC has had many years of experience in considering whether the legislation applies in a variety of factual situations. There have also now been a series of cases testing the application of the legislation in the courts.

HMRC’s more in depth understanding of how the legislation applies, and views on what are useful factors to consider in assessing the evidence, are reflected in this updated guidance. However, HMRC regards the Economic Secretary’s comments, and the summary of them in the original guidance, as being consistent with HMRC’s understanding of the law, then and now.

In general, whilst this updated guidance reflects HMRC’s current views and has priority should there be any difference between it and an earlier version, the fact that a particular statement or example is not included in this updated guidance does not of itself mean that HMRC no longer agrees with it. For instance, an example may not now be included because it is no longer regarded as of useful general application.

HMRC officers should not apply the unallowable purpose provisions without first discussing the matter with the relevant Tax Planning Specialist or International Tax Specialist, who will also assist with engagement with Counter-Avoidance Technical Team, see CFM38200.