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Court rejects Kwik-Fit group's loss relief scheme

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The Court of Appeal has rejected Kwik-Fit Group's attempt to accelerate tax loss reliefs by 25 years, ruling the tax avoidance scheme as unallowable.

22nd May 2024
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Even hardened accountants are sometimes surprised by the lengths to which the relatively well-off go in efforts to obtain a tax advantage when there are large enough amounts at stake.

This scheme, developed with the aid of PwC, attempted to accelerate loss reliefs by around 25 years by taking advantage of arcane interpretations of legislation and what the Court of Appeal regarded as disguised artificiality designed to benefit taxpayers at the expense of the Exchequer.

Background

The appeal relates to a reorganisation of intra-group debt within the Kwik-Fit group in 2013 following its acquisition a couple of years before by the Itochu Corporation of Japan.

Under the reorganisation intra-group receivables were assigned to an intermediate holding company within the Kwik-Fit group, Speedy 1 Limited (Speedy 1), and certain additional receivables created in Speedy 1’s favour. Further, the interest rates on the amounts owed were increased. At the time, Speedy 1 was carrying forward tax reliefs totalling around £48m in the form of non-trading loan relationship deficits.

As a result of the transactions, losses would be offset in under three years rather than the 25 previously estimated by the group tax manager.

HMRC asserted that the reorganisation engaged the unallowable purpose rule in s.441 CTA 2009. They therefore disallowed relief claims over and above Speedy 1’s non-trading deficits.

Kwik-Fit appealed to the first tier tribunal (FTT) and then the upper tribunal (UT), both of which found in favour of HMRC.

Relevant Legislation

The primary loan relationships legislation features in Part 5 of CTA 2009 and includes the unallowable purpose rule in s.441. This states:

(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.

Section 442 delineates the 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.

(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.

It goes on to explain that the tax avoidance purpose is only regarded as for a business or other commercial purpose if it is not the main one of the main purposes of the transaction.

FTT and UT Findings

After considering the transactions and motivations of the parties exhaustively, FTT “concluded that the decisions to increase the rate of interest on the Pre-Existing Loans provided strong evidence that the Appellants had acquired a new purpose for being party to them, in addition to their existing commercial purpose. This was a tax avoidance purpose, and was important as it was integral to the steps taken. It was a main purpose.”

There was also a question concerning appropriate apportionment. However, having decided that the main purpose was to avoid tax, FTT confirmed that all of the debt must be attributed to the unallowable purpose.

In other words, it rejected all of the appellants’ conjectures.

UT upheld both of these decisions.

Court of Appeal

Lady Justice Falk’s judgement (approved by her two fellow Judges) addressed two issues.

  1. Had the tribunals erred in concluding that the main purpose was to obtain a tax advantage?
  2. Was it just and reasonable to apply the whole of the advantage to the unallowable purpose and should transfer pricing legislation have been taken into account?

In support of the group’s claims, cases including BlackRock, Sema and Kleinwort Benson were cited (details and links to relevant reports can be found in the case report).

With regard to the main purpose issue, the judges decided that the tax advantage was the generation of cash tax savings through the creation of a deductible interest expense.

It naturally followed that there was no unfairness, even though the pre-existing loans had a commercial purpose.

While agreeing that in most circumstances this would be the decisive factor, “it cannot have been Parliament’s intention that the unallowable purpose rule will be engaged as an inevitable consequence of taking out (or, I would add, maintaining) a loan, or indeed charging interest on it at a commercial rate, subject only to consideration of whether the value of the tax benefits are sufficient to make a ‘main’ purpose.

“The mere fact that a group organises its affairs in a manner that makes use of brought forward non-trading deficits and that it expects to obtain relief for interest and other expenses of loan relationships, in each case as the legislation contemplates, cannot be enough to engage the unallowable purpose rule.”

Regarding the second issue, in that there was no commercial purpose, it followed that the apportionment should be as HMRC contended.

Once again, a taxpayer that implemented complex arrangements that were primarily designed to obtain a tax advantage failed to persuade the courts of their validity. The big winners will be HMRC and the professionals involved.

Replies (10)

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By Paul Crowley
22nd May 2024 14:52

Tax avoidance schemes that fail are really are always good news for the honest taxpayer

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Replying to Paul Crowley:
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By FactChecker
22nd May 2024 21:15

... plus apparently any 'morally open-minded' advisers!

[see final 4 words above - "The big winners will be HMRC and the professionals involved."]

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By mkowl
23rd May 2024 08:34

Just to show you can't get quicker by being a Kwik Fit accountant

Might need to work on that strapline

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Replying to mkowl:
Melchett
By thestudyman
26th May 2024 00:55

They are clearly not the ones to trust!

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By listerramjet
23rd May 2024 08:54

There does seem to be a certain amount of effort to limit the relief in favour of the exchequer in the form of the words used. Surely tax law should have as its purpose a clear intention to define clear rules without any bias for either side. And actually you might also argue the courts are acting in favour of the national interest, which may be in fiduciary breach of certain international treaties.

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Replying to listerramjet:
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By michaelblake
23rd May 2024 13:33

Or as Dawn Primorolo said of tax avoidance a number of years ago, when Financial Secretary to the Treasury, “Those who play with fire should expect to get their fingers burned”

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Replying to michaelblake:
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By richard thomas
30th May 2024 16:05

Sorry to be commenting so late, but my previous attempt was queued for moderation last Friday and has vanished.

While Dawn may well have said that, and indeed I may even have supplied her with the quote when working for her on anti-avoidance legislation, it comes originally from the case of Lord Howard de Walden v CIR (25 TC 121) on the TOAA legislation, where Lord Greene MR said:

"The Section is a penal one and its consequences whatever they may be, are intended to be an effec-tive deterrent which will put a stop to practices which the Legislature considers to be against the public interest. For years a battle of manoeuvre has been waged between the Legislature and those who are minded to throw the burden of taxation off their own shoulders on to those of their fellow subjects. In that battle the Legislature has often been worsted by the skill, determination and resourcefulness of its opponents, of whom the present Appellant has not been the least successful. It would not shock us in the least to find that the Legislature has determined to put an end to the struggle by imposing the severest of penalties. It scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers."

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By listerramjet
23rd May 2024 08:57

There does seem to be a certain amount of effort to limit the relief in favour of the exchequer in the form of the words used. Surely tax law should have as its purpose a clear intention to define clear rules without any bias for either side. And actually you might also argue the courts are acting in favour of the national interest, which may be in fiduciary breach of certain international treaties.

Thanks (1)
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By eamonng
23rd May 2024 09:58

'Kwik Fit accelerate into HMRC speed trap'

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By SuperAccountingSteve
29th May 2024 16:12

This will go towards offsetting the £50m that DWP sent to bulgarian rufians in fake benefit claims.

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