First-tier Tribunal decision in Syngenta and unallowable purpose

Elizabeth Wilson KC looks at the significance of the decision in Syngenta Holdings v HMRC.

Introduction

Syngenta Holdings Limited v HMRC [2024] UKFTT 998 (TC) (“Syngenta”) is the first published decision on ss 441-442, Corporation Tax Act 2009 (“CTA 2009”) (‘the unallowable purpose rule’) since the Court of Appeal handed down judgment in BlackRock Holdco 5 LLC v HMRC [2024] EWCA Civ 330 (“BlackRock”); Kwik-Fit Group Ltd & ors v HMRC [2024] EWCA Civ 434, (“Kwik-Fit”) and JTI Acquisition Company (2011) Ltd v HMRC [2024] EWCA Civ 652 (“JTI”).

What is ‘the unallowable purpose rule’’?

It is an anti-avoidance rule found in the corporation tax code. It applies in any accounting period in which a company has an “unallowable purpose” for being party to a loan relationship (i.e., a borrowing). Where there is such a purpose, the company may not bring into account for that period so much of any debit (i.e., interest) in respect of that relationship as on a just and reasonable apportionment is attributable to the unallowable purpose (see s 441(3)).

A loan relationship of a company has an “unallowable purpose” if the purposes for which the company is party to that loan relationship or for which the company enters into transactions which are related transactions by reference to it include one that is “not amongst the business or other commercial purposes of the company” (see s 442(1)).

A tax avoidance purpose is an unallowable purpose if it is “the main purpose, or one of the main purposes, for which the company is a party to the relationship” (see s 442(4)). The word “main” has a connotation of importance.

References to a “tax avoidance purpose” in s 442(3) and (4) are “to any purpose which consists of securing a tax advantage for the company or any other person” (see s 442(5)). “Tax advantage” is defined by s 1139 CTA 2010 (s 476(1) CTA 2009) to include “(a) a relief from tax…” and “(c) the … reduction of a charge to tax or an assessment to tax”. Group relief is a good example of a relief “for any other person”.

If the facts reveal an unallowable purpose, “so much of” any debit that is “attributable” to the unallowable purpose must be disallowed: s.441(3).

When referring to a company’s purposes, it is the subjective purposes that matter. The attribution exercise is objective and evaluative, and made by reference to the findings on the company’s subjective purposes.

What did Syngenta do to risk application of the rule?

Syngenta Holdings Limited (“SHL”) was a member of the group headed by Syngenta AG (“SAG”) (the ” Group”).

On 26 January 2011, SHL acquired the entire issued share capital of Syngenta Limited (“SL”) from its parent company, Syngenta Alpha BV (“SABV”) for consideration of US$2,208,220,000 (“the Transaction”).

The consideration provided by SHL consisted of: (i) a payment in cash, which was funded by way of a US$950,000,000 loan (the “Loan”) from Syngenta Treasury NV (“STNV”); and (ii) the issue and allotment of shares to SABV having a total value of $1,258,220,000. The Loan was for a ten year term with the interest rate to be fixed annually on the basis of the 12 month USD LIBOR rate as at 31 December plus a margin of 2.87%.

SABV then made an interim distribution in the amount of the Loan to its parent.

The Transaction thus had the effect of reorganising the main UK subsidiaries so that they formed a single subgroup headed by SHL.

In the accounting periods ending 31 December 2011 to 31 December 2016, Syngenta treated the interest on the Loan as giving rise to deductible debits for corporation tax purposes in accordance with Part 5, CTA 2009. Those debits were valuable and motivating to the Group because SHL (having no taxable profits of its own) could surrender its loss to other UK companies in the UK subgroup, and so reduce the Group’s tax bill.

HMRC opened an enquiry and concluded the main purpose of SHL in being party to the Loan was an unallowable purpose within the meaning of s 442 CTA 2009 and therefore SHL was not entitled to a deduction for interest paid under the Loan. The closure notices amended the company’s returns to give effect to that conclusion.

What did the Tribunal decide?

The Tribunal found that SHL had an unallowable purpose for being party to the Loan in the periods under appeal.  The unallowable purpose rule was thus engaged. Further, SHL had no other non-tax main purpose for being party to the Loan. The Tribunal accordingly attributed all the debits to the unallowable purpose and dismissed the appeal.

How did the Tribunal approach the case?

The Tribunal began by looking at the Group’s purposes. It found that “tax considerations” were why the Group decided to implement the Transaction. The debits were not a mere benefit of the Transaction but were the reason why the Transaction was entered into.

With that in mind, it then turned to the subjective purposes of SHL (the relevant purpose for ss 441-442). It held that the directors of SHL entered into the Transaction in order to play their part in the Transaction in support of the Group’s purposes. The directors’ only caveat was that they did not want to make a bad investment.

The Tribunal rejected SHL’s positive case for why it was party to the Loan. The Tribunal was not persuaded by the oral testimony of SHL’s then director or its senior group tax manager to the effect that the driver for the Transaction was variously making a good investment, dividend planning, or entity simplification. The contemporaneous documentation was found to tell another story, and where there was contemporaneous evidence of a commercial purpose, the Tribunal discounted it as mere window-dressing. Put short, SHL did not meet the burden of proof.

The Tribunal was alive to the fact that s 441 is concerned with SHL’s purposes for being party to the Loan (not the wider scheme). However, on the facts before it, the Tribunal clearly took the view that the purpose of the SHL directors in entering into the Loan was the same as their purpose in entering into the Transaction. That purpose was to play their part in what they understood to be the Group project of obtaining deductible debits (a tax advantage) through making interest payments on the Loan. That purpose was the main purpose, indeed the only purpose, of the SHL directors in entering into the Loan.

It followed that SHL had a “tax avoidance purpose” as it was to secure a tax advantage and it was not a business or other commercial purpose as it was the main purpose for being party to the Loan. It follows that it was an “unallowable purpose”.

Why is the case significant?

Syngenta concerns a straightforward transaction where the amount borrowed was put to use to buy a commercial asset. A deduction was claimed in respect of the interest cost. It does not seem to have been unduly artificial. Understanding why this appeal failed should therefore help in understanding the unallowable purpose test.

What the case illustrates is that effect is different from purpose, and subjective purposes are infinitely varied. There are many reasons why a company might act. One of them is tax avoidance as defined. In Blackrock at [162], Falk LJ said that, as Nugee LJ had suggested in argument, “a simple starting point in ascertaining a person’s purpose for doing something is to consider ‘why’ they did it”.  Although companies might generally enter into borrowing for commercial purposes, with the choice of funding and its tax treatment being part of the how, not the why, that is not always the case.

Further, where a group company is invited to play a role in a wider scheme which has a tax avoidance purpose, the purposes of the group and the wider scheme can be informative of that company’s purpose. As Newey LJ said in JTI, a Tribunal determining whether a company has a tax avoidance purpose is not required to adopt a “tunnel-visioned” approach looking simply at how the group company will “use” the money it was borrowing: at [51] (vi).

Consider the facts in JTI. A special purpose vehicle (SPV) is created in the UK by a US headed group, to become a party to a loan relationship as a step in a plan designed to create an amount of freely available group relief. The evidence shows that the only reason for creating the company, and for the company borrowing intra group is to create the relief and reduce the tax paid by the group on its profits. The SPV adds no other value to the group. If the SPV’s decision makers agree to enter into the borrowing to assist the group in its purpose (“play its part”), knowing all the background facts, one can see that it is open to a tribunal to find that the SPV’s subjective purpose in being a party to that loan relationship is the same as the group’s purpose for it and the wider scheme (and it is securing a tax advantage).

Newey LJ gave the leading judgment in JTI. At [51] he observed that depending on the facts, the purposes of the wider scheme which the company was intended to advance, may bear on the company’s purposes in entering into the loan relationship.  Indeed, “a company will have a “tax avoidance purpose” within the meaning of s 442 if it is seeking to play its part in a scheme which, to the knowledge of the relevant decision-makers, was designed to secure a tax advantage”. Moreover, if it can be said that “the company wishes to go along with such a scheme whatever its purposes might be, it may well be that the company has an unallowable purpose regardless of whether it appreciates that the scheme was designed to secure a tax advantage. It may suffice that those promoting the scheme have that intention”: at [51] per Newey LJ.

Turning back to Syngenta, it gives us a straightforward practical example of Newey LJ’s first proposition. The evidence showed that the effect of the Transaction was a reorganisation of the UK group companies, but that was not the purpose of the Transaction, nor the Loan. SHL’s purpose (as found by the Tribunal) was the group purpose. Result: the appeal failed.

The limits of Syngenta

Syngenta does not mean that every case in which money is borrowed intra group fails the unallowable purpose test.  The Court of Appeal are clear that the rule should not apply in ordinary cases.  Consider for example Newey LJ in JTI at [55]

“What I think emerges from … [Inland Revenue Commissioners v Brebner [1967] 2 AC 18] and BlackRock is the importance of the specific facts. As Lord Upjohn indicated, the fact that a genuine commercial transaction has been carried out in a tax efficient way does not necessarily mean that one of the main objects was to avoid tax. Similarly, the fact that regard was had to tax considerations when deciding to borrow will not necessarily involve falling foul of the unallowable purpose rule. The rule will be in point if, in the particular circumstances, a main purpose was securing a tax advantage.”

Also, Falk LJ in Kwik-Fit at [87]

“However, as this Court recognised in Sema, …the significance of the tax advantage to the taxpayer must be considered with care. I would add that it should also be considered in the context of the relevant legislative code. As Lightman J [in Sema] also explained, there is a range of possibilities. The possibilities include that the tax advantage may be a “feature” or a “relevant factor” without being a main object. (I would take the opportunity to clarify that Lightman J was not saying in the preceding sentence that anything that is more than “icing on the cake” will be a main object, rather that if it is no more than that then the answer is obvious that it will not be.) But the important point is that whether a purpose is a main purpose is a question of fact for the fact-finding tribunal, which cannot be interfered with in the absence of an error of law.”

Conclusion

The line will doubtless become clearer as more cases come though the courts. It is also worth remembering that in other cases there may be room for negotiation over the attribution.

This article first appeared in Taxation magazine.

Elizabeth Wilson KC acted for HMRC in the related cases of Kwik-Fit & JTI.  See also her podcast on the topic.