Tax

Guidance on the “unallowable purpose” rule within HMRC’s Corporate Finance Manual was updated on 7 May 2025. The changes reflect case law developments, most notably the recent Court of Appeal decisions in each of the BlackRock, Kwik-Fit and JTI cases (the latter two of which have been considered in prior Weil Tax Blogs).

The unallowable purpose rule prohibits companies from bringing loan relationship debits into account for UK corporation tax purposes to the extent such debits are attributable, on a just and reasonable basis, to an “unallowable purpose”. This means a purpose which is not amongst the business or other commercial purposes of the company, and includes a main purpose of securing a tax advantage. The difficulties inherent in discerning a company’s purpose (and its main purpose) have been at the centre of the swathe of recent litigation regarding the rule.

In its updates to the Corporate Finance Manual, HMRC has embedded key takeaways from recent case law and, in particular, provided more extensive guidance on whose purpose is relevant, the determination of purpose and main purpose, the meaning of “tax advantage”, and attribution on a just and reasonable apportionment.

Citing BlackRock, the guidance has been updated to confirm that the relevant purpose is that of the company party to the loan relationship. Noting that this question was also considered in JTI, the guidance goes on to explain that the determination of the company’s purpose is informed by the purpose of the company’s decision-makers, typically the directors. The additional relevance of any corporate group context and group decision-making – both of which are likely to feature in loan relationships entered into as part of a group restructuring – is also further considered and elucidated by reference to both the BlackRock and JTI cases.

The guidance on determination of purpose and main purpose has been extensively reworked, emphasising (with reference to Kwik-Fit) that these are questions of fact for the tribunal. Citing each of BlackRock, Kwik-Fit and JTI, HMRC reiterates the principle that the determination of purpose looks to the subjective intentions of the taxpayer, and highlights the Court of Appeal’s view that the analysis is not limited to a “tunnel-visioned approach”, considering only how the loan is immediately employed by the taxpayer company; in other words, wider arrangements of which the loan forms part may also be relevant.  As to whether a purpose will amount to a main purpose, HMRC explains that “[t]his is a question of significance, to be assessed by reference to all the relevant facts and circumstances; and ‘main’ carries a connotation of importance.” Referring to key case law quotes (including from each of BlackRock, Kwik-Fit and JTI), HMRC provides a set of basic principles for assessing significance, noting that motive and consequences are relevant, but not determinative, and that factors of particular relevance in relation to a “tax advantage” purpose include degree of attention to obtaining the advantage, the size of the advantage (particularly in relation to the size of the commercial benefit), the impact on net UK tax benefits and what would have happened “but for” the tax advantage (i.e., would the transaction have been implemented in the same way in the absence of the tax benefit). The updated guidance on the meaning of tax advantage cites Kwik-Fit as authority for the principle that the existence of a tax advantage need not entail precise knowledge of the amount, or beneficiaries, of the tax saving in question. Referring to BlackRock, the HMRC guidance also notes that the existence of a main tax avoidance purpose and a main commercial purpose are not mutually exclusive.   

Finally, each of BlackRock, Kwik-Fit and JTI is discussed extensively in the updated guidance regarding attribution on a just and reasonable apportionment. This aspect of the HMRC guidance is relevant only if a loan is considered to have an unallowable purpose, in which case so much of the debits as are attributable to that purpose are disallowed. From the aforementioned cases, HMRC extracts a number of guiding principles, noting that the test is an objective one (albeit with reference to the taxpayer’s subjective purpose(s), once established) and that the facts and circumstances, based on available evidence, are critical. Unsurprisingly, the guidance also refers to the “but for” test which appears in the aforementioned Court of Appeal decisions, and which broadly asks to what extent the relevant debits would have arisen “but for” the unallowable purpose.

Comment

The updates to the Corporate Finance Manual usefully pull together the key themes and principles which have emerged from the recent Court of Appeal decisions. However, the unallowable purpose decisions have also consistently highlighted the very fact-specific nature of ascertaining a company’s purpose for a loan relationship, so the complexity of the analysis – including the possible nagging doubts around the position taken – is likely to linger. Please speak to your usual Weil London Tax contact for more information.