UK tax tribunal suggests stricter requirements for articulating commercial purposes

Tax law expert at Pinsent Masons, Jake Landman, was commenting following the FTT’s judgment (69 pages/ 8.6MB) in the case of Syngenta v HM Revenue and Customs (HMRC).

“The judgment arguably suggests that companies must do more than what may have been typical previously.  It is perhaps unfair to view debt financed transactions completed many years ago through this lens but those undertaking transactions now will no doubt be alive to this,” said Landman.

This dispute centres on the application of the UK’s “unallowable purpose” rules. Under this regime, a UK corporate taxpayer is prevented from deducting the cost of its debt finance, including interest, in calculating its profits for corporation tax purposes if the loan is entered into for an “unallowable purpose”. A company is treated as having an unallowable purpose when the main purpose, or one of the main purposes of it entering the loan is to secure a tax advantage. There is a just and reasonable apportionment mechanism for instances where there are both commercial and tax main purposes.

Syngenta Holdings (SHL) is a UK company within the global Syngenta group. In 2011 it acquired the shares in Syngenta Limited (SL), another company in the same group that had, until then, been a subsidiary of a non-UK entity in the group.

In order to fund the acquisition of the shares in SL, SHL borrowed funds from another Dutch group entity. It then paid that cash to the selling company alongside issuing shares to the selling company to satisfy the purchase price.

SHL claimed deductions for the interest it paid on the loan – non-trading loan relationship debits. HMRC challenged these deductions, arguing that SHL had entered the loan for an unallowable purpose and therefore SHL was not entitled to the debits.

SHL appealed to the first-tier tribunal (FTT). The FTT decided that the wider group’s purpose in undertaking the reorganisation was to obtain a tax advantage in the form of tax deductions for loan interest in the UK.

SHL directors decided that they were willing to play their part in achieving the group’s purpose, provided they could be satisfied that they were not making a bad investment for the company. The FTT decided that this was contrasted with making a good investment. However, SHL could have avoided a bad investment by simply not doing it, therefore the FTT concluded they were influenced to complete the transaction by the group’s desire for a tax saving.

The tribunal found that the sole purpose of the transaction was to achieve tax saving. Evidence of other purposes such as simplification of the group structure and freeing up dividend blocks were given little weight by the FTT based on the evidence. SHL’s purpose in entering into the loan was also determined to be the same as entering the transaction as a whole – for tax saving purposes.

Having found there was only one main purpose, the FTT found that all the debits should be attributed to that unallowable purpose and therefore the company is unable to make any deductions for this loan in calculating its profits for corporation tax. 

“The tribunal seems to have proceeded on the basis of an unrealistic expectation as to in how much detail sound commercial purposes would be captured in contemporaneous documents at that time,” said Landman.