Unallowable purpose and debt pushdown arrangements

The FTT has held that an acquisition by a new UK holding company of UK group subsidiaries for a combination of shares and debt involved an unallowable purpose: Syngenta Holdings Ltd v HMRC [2024] UKFTT 998. The FTT rejected, on the facts, the argument that the directors of the new holding company were purely motivated by a desire to enter into the deal on its own merits from the acquiring company’s point of view. Viewing the evidence in the round, including all of the group planning documentation from an early stage, it was clear that the directors were motivated by their desire to “play their part” in the group arrangements provided only that they satisfied themselves as to the correct valuation of the subsidiaries and the ability to service the interest payments. In these circumstances, their objective was the same as the over-arching group motivation for the arrangements.

The decision is another important one in this context and follows HMRC's updated guidance on the application of the unallowable purpose rule. No doubt HMRC will consider that its interpretation of the legislation set out in that expanded guidance is further supported by this latest decision.

Background

Syngenta is a large agricultural group of companies with its headquarters in Switzerland. In 2011, it decided to set up a new UK holding company, Syngenta Holdings Ltd (SHL) to acquire the shares in Syngenta Ltd (SL) which owned the UK sub-group. The consideration for the acquisition of SL from its parent company within the group was around $2.2bn made up of a cash of $950,000 and the issue of new shares in SHL. The cash element was financed by an intra-group loan from Syngenta Treasury NV (STNV). The loan was subject to an advance thin cap agreement with HMRC in 2012.

SHL later sought deductions for the interest payments on the loan from STNV. HMRC opened an enquiry into the corporation tax returns and decided that the loans were subject to the unallowable purpose rules in CTA 2009 s.441. This prevents deductions within the loan relationship rules where a loan has an “unallowable purpose”. SHL appealed that decision.

FTT decision

The decision of the FTT goes through the documentary (some 8,500 pages) and witness evidence in great detail. In doing so, it noted the approach to evidence set out by Leggatt J in Gestmin SGPS v Credit Suisse, being that the best approach (given the “interference” with memory caused by time and the civil litigation process) for a judge to adopt is to place little reliance on witnesses recollections and base factual findings on inferences drawn from the documentary evidence and known and probable facts. In addition, the FTT was critical of some of the witness evidence it received from SHL. It noted inconsistencies with the stated recollection versus the contemporary documents, and found that some of the evidence was unreliable, contradictory, unconvincing and at times evasive.

In this case, it was clear from the documentary evidence that the birth of the transaction arose out of a “tax optimisation project” to push debt down into the UK group at a time that the UK group had used up existing tax losses. The early documentary evidence was clear on this issue. From a group planning perspective, the purpose of the scheme was to push debt down into the UK group to reduce taxable profits in the UK through the use of tax deductible interest payments.

It was argued that the UK tax benefits were merely a bye-product of a group simplification process and that introducing SHL was part of that process to simplify the UK group structure. Syngenta relied on later project planning documentation which specifically alluded to this purpose. However, the FTT noted that the documentation had also indicated that “simplification was being used to help with our business purpose arguments” and therefore approached these documents with “circumspection”. The FTT also noted that, unlike the tax benefits, there was no elaboration on how the “simplification” provided benefits. As such, the FTT concluded that any simplification benefits were minimal in comparison with the costs and were not a purpose of the arrangements. These purported benefits were not genuine and instead reflected an awareness of the need to present a commercial rationale for the transaction that could withstand scrutiny upon a subsequent challenge from HMRC.

The taxpayer’s main argument, however, was that the relevant purpose in this case was the purpose of the directors of SHL in entering into the purchase. Those directors had only looked at the transaction from the perspective of the benefit of SHL, had decided that it was a good deal and had, as such, proceeded with the transaction. Even if the overall group’s purpose was to obtain a tax benefit from the pushdown of debt into the UK, it was not the purpose of SHL (through its directors) for entering into the transaction.

The FTT has rejected that argument on the facts. Viewing the evidence broadly, the FTT concluded that the approach of the directors of SHL was that they were willing to enter into a transaction supported by the group provided it was not a bad investment for SHL. As such, they were willing to play their part in the transaction to support the wider group purpose, once satisfied that (for example) the likely dividends from SL would support the debt interest payments and the valuation of the sub-group had been ascertained.

Moreover, the FTT noted that the various planning documentation did not focus on the question of SL being a good investment. They did not consider the profits or capital growth of SL. There was a valuation report, however, the FTT considered that this was simply consistent with the directors wanting to ensure that they did not make a “bad investment” and concern over personal liabilities if things went wrong. The FTT concluded that simply avoiding a bad investment, rather than actively pursuing a good investment, was not enough to create a freestanding commercial purpose for entering into the loan. The FTT noted that the easiest way for the directors to ensure that they avoided a “bad investment” would have been not to enter into the transaction at all. The fact that they did showed that something else must have caused them to do so. The FTT concluded that something else was a desire to play their part in assisting the group tax planning purpose.

The taxpayer pointed to the fact that the directors would equally have been willing to enter into the transaction if it had been purely an equity transaction and this showed that, for those directors, the group tax advantage was not important. The FTT rejected the counter-factual argument as having limited value, given that the offer to SHL to buy SL was part of a package necessarily involving the use of debt and there was no evidence (and little likelihood) that any such arrangement would have been made available to SHL by the group.

The FTT concluded that the directors reasons for entering into the loan were the same as their purpose in entering into the transaction, and that was to play their part in the group project to obtain tax deductions for interest in the UK group. That purpose was the main purpose and indeed the only purpose of the directors of SHL in entering into the loan. That purpose was a tax avoidance purpose and, as such, an unallowable purpose.

Given the FTT's finding that the sole purpose of entering into the loan was an unallowable purpose, it did not need to consider a just and reasonable apportionment of the debits between allowable and unallowable purposes. The FTT’s conclusion that the loan had a sole unallowable purpose meant that the entirety of the debits arising from the loan were not allowable for corporation tax purposes.

Comment

This is the latest in a series of unallowable purpose cases to go HMRC’s way. Equally, it is another case where the courts and tribunals have been heavily influenced by the wider group motivation for the transaction. The taxpayer in this case sought to demonstrate that the directors of the borrowing company, whilst aware of the wider group purpose, were only motivated by the need to ensure that the transaction was a good one for SHL to enter into. However, the FTT has concluded that they were in fact wholly motivated by their desire to “play their part” in the group arrangements, provided only that they had ascertained that the risks of a “bad deal” were minimal. Since the group arrangements were motivated by a desire to obtain interest deductions in the UK which could be used to reduce the UK taxable profits, this was an unallowable purpose.

The transaction in this case is one that would appear to fit broadly into the intent behind Example 12 in HMRC’s most recent guidance, albeit the specific factual example in that case involves a UK company taking on internal borrowing to acquire non-UK subsidiaries and the group advantage in this case arose out of a 25% differential in tax rates between the UK group and the STNV (rather than non-taxation).

Example 12 deals with: “cross-border group financing where there is:

• a choice to enter into wholly internal debt financing between a parent and a UK subsidiary which the UK subsidiary uses to acquire shares in a group company from a non-UK subsidiary
• in circumstances where:
  • there is no commercial (non-tax) link to the UK subsidiary, and no material net group commercial (non-tax) benefit from involving the UK
  • a net global tax benefit is available, taking account of capacity for UK interest deductions and, given the existence of losses, non-taxation of interest receipt in the non-UK parent, and a lack of capacity for interest deductions in the jurisdiction of the non-UK subsidiary transferor.”