In Oxford Instruments UK 2013 Ltd v HMRC [2019] UKFTT 254 (13 April 2019), the FTT found that the issue of a promissory note by a UK subsidiary to its US parent had an unallowable purpose, even though it was part of a group-wide refinancing and debt restructuring exercise.
HMRC had issued a closure notice to the effect that Oxford Instruments UK (OI UK) was not entitled to any relief for the interest which had accrued in respect of a promissory note with a principal amount of $140m which it had issued to its US resident immediate parent company. This was on the basis that OI UK had an ‘unallowable purpose’ (CTA 2009 s 442) in entering into, and remaining party to, the $140m promissory note; and that all of the interest which had accrued under the $140m promissory note in respect of the relevant accounting period was attributable to that unallowable purpose. It was therefore not deductible.
The FTT found that the promissory note had been issued at step 8 of a single scheme. It noted that the US objectives of the scheme (partly refinancing and partly simplification of the debt structure) would have been achieved if the scheme had not implemented step 8 (and had comprised only steps 1 to 7). However, if step 8 had not been implemented, the scheme would have given rise to net taxable income in the UK in an amount which was equal and opposite to the net deductible interest in the US. The FTT added that a Deloitte presentation suggested that the commercial profit included in the planned scheme was the means to justify the existence of the transactions which OI UK needed to implement in order to achieve its purpose. The sole purpose of the incorporation of OI UK, and its role in the scheme as a whole, was therefore to secure the UK deductions.
Finally, the FTT accepted that the purpose of the group as a whole was to achieve the US objectives. However, this did not alter the fact that the purpose of OI UK in issuing the promissory note was to secure the UK tax deduction.
Why it matters: The FTT had ‘some sympathy for the appellant, which was persuaded to enter into a structure that it believed, with good reason, had the apparent blessing of the respondents, only to discover that that blessing was a mirage’. HMRC had given clearance in relation to the arbitrage regime but had not flagged the potential unallowable purpose, as its view of this type of transaction had changed since giving the clearance.
In Oxford Instruments UK 2013 Ltd v HMRC [2019] UKFTT 254 (13 April 2019), the FTT found that the issue of a promissory note by a UK subsidiary to its US parent had an unallowable purpose, even though it was part of a group-wide refinancing and debt restructuring exercise.
HMRC had issued a closure notice to the effect that Oxford Instruments UK (OI UK) was not entitled to any relief for the interest which had accrued in respect of a promissory note with a principal amount of $140m which it had issued to its US resident immediate parent company. This was on the basis that OI UK had an ‘unallowable purpose’ (CTA 2009 s 442) in entering into, and remaining party to, the $140m promissory note; and that all of the interest which had accrued under the $140m promissory note in respect of the relevant accounting period was attributable to that unallowable purpose. It was therefore not deductible.
The FTT found that the promissory note had been issued at step 8 of a single scheme. It noted that the US objectives of the scheme (partly refinancing and partly simplification of the debt structure) would have been achieved if the scheme had not implemented step 8 (and had comprised only steps 1 to 7). However, if step 8 had not been implemented, the scheme would have given rise to net taxable income in the UK in an amount which was equal and opposite to the net deductible interest in the US. The FTT added that a Deloitte presentation suggested that the commercial profit included in the planned scheme was the means to justify the existence of the transactions which OI UK needed to implement in order to achieve its purpose. The sole purpose of the incorporation of OI UK, and its role in the scheme as a whole, was therefore to secure the UK deductions.
Finally, the FTT accepted that the purpose of the group as a whole was to achieve the US objectives. However, this did not alter the fact that the purpose of OI UK in issuing the promissory note was to secure the UK tax deduction.
Why it matters: The FTT had ‘some sympathy for the appellant, which was persuaded to enter into a structure that it believed, with good reason, had the apparent blessing of the respondents, only to discover that that blessing was a mirage’. HMRC had given clearance in relation to the arbitrage regime but had not flagged the potential unallowable purpose, as its view of this type of transaction had changed since giving the clearance.
