JTI ACQUISITION COMPANY (2011) LIMITED Revenue & Customs (CORPORTION TAX - whether non-trade loan relationship debits to be disallowed) [2022] UKFTT 166 (TC) (19 April 2022)

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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> JTI ACQUISITION COMPANY (2011) LIMITED Revenue & Customs (CORPORTION TAX - whether non-trade loan relationship debits to be disallowed) [2022] UKFTT 166 (TC) (19 April 2022)
URL: http://www.bailii.org/uk/cases/UKFTT/TC/2022/166.html
Cite as: [2022] SFTD 1089, [2022] UKFTT 166 (TC)

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Neutral Citation: [2022] UKFTT 166 (TC)

Case Number: TC 08493

FIRST-TIER TRIBUNAL

TAX CHAMBER

By remote video hearing

 

Appeal reference: TC/2019/04496

 

CORPORTION TAX - sections 441 and 442 CTA 2009 - whether non-trade loan relationship debits to be disallowed - UK company incorporated to be the holding company to acquire a US group by stock purchase - cross-jurisdiction intercompany loan between US parent and UK holding - whether the loan relationship had an ‘unallowable purpose’ - whether securing a ‘tax advantage’ was not the main or one of the main purposes - whether attribution on a just and reasonable basis - appeal dismissed

 

Heard on: 23 to 25 March 2021 followed by

written submissions on 6 and 16 April 2021

 

Judgment date: 19 April 2022

Before

 

TRIBUNAL JUDGE HEIDI POON

 

Between

 

 

JTI ACQUISITION COMPANY (2011) LIMITED

 

Appellant

 

 

- and –

 

 

 

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS

 

Respondents

 

Representation:

For the Appellant:       John Gardiner QC, and Michael Ripley, of counsel, instructed by RPC LLP

For the Respondents: Elizabeth Wilson QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs

 

DECISION

Introduction

Issues for determination

Evidence

Agreed Facts, Transcript and Post-hearing submissions

Legislative Framework

Loan relationship regime

441 Loan relationships for unallowable purposes

442 Meaning of “unallowable purpose”

1139 “Tax advantage”

(da) the avoidance or reduction of a charge or assessment to a charge under Part 9A of TIOPA 2010 (controlled foreign companies)

[(e) & ©•••]

Anti-arbitrage rules

Authorities

The Facts

Background

Corporate entities

Key personnel

US-based

UK-based

Chronology of key events

to the acquisition of LTT.

Company Inc as seller in connection with the acquisition of LTT.

Deloitte Milwaukee and Deloitte UK on that day to discuss ‘the global tax planning idea’ in relation to the acquisition structure for LTT, attaching a 9-step plan called ‘the Skinny’.

that the acquisition structure ‘will provide Joy UK some fairly substantial prospective tax savings’. A Draft Workplan and a copy of Deloitte presentation were attached.

appointing Olsen, Kisten and Mannion as directors.

the LTT acquisition without regard to the broader benefits.

allotment of shares, the borrowings of $500m (as interest free loan) and $550m (as loan notes), and the assignment of the purchase agreement of LTT.

parent JTI for the loan of $550m.

Assumption Agreement over the rights and obligations of JGI as purchaser of LTT.

‘Project Longhorn’ to acquire LeTourneau

I.     Merrill Lynch presentation - 6 April 2011

Drilling Products Business Case

‘Ranch’s competitors more likely to order jackups and equipment when Longhorn is independent;

Demostrate and quantify Longhorn design advantages.’

Longhorn stock valuation discussion

‘the date on which the Closing occurs, which shall be five Business Days following the date on which all conditions set forth in Article 6 shall have been satisfied or waived. ..’

The ‘Global Tax Planning’ Idea

I.     Inception of the global tax planning idea - 2 June 2011

Deloitte’s proposal on ‘LeTourneau Acquisition Structure’

UK Ant-arbitrage

Deductibility of interest (UK and State)

Timing of deduction

Withholding tax

Currency

Accounting

The 9- step ‘Skinny ’: O’Brien to Olsen/Major - 2 June (5:04pm)

The skinny is as follows:

Action plan to implement the Skinny

Action Steps Required - Next week

Deloitte’s fee proposal: O’Brien to Olsen - 3 June (6:13pm)

‘Attached is Deloitte’s fee quote in USD translated at today’s spot (GBP to USD):

Design, Implementation and Technical Analysis - $240 to $290K

Assistance in obtaining an [ATCA] - $40 to $50K.

Total quote $280 - $290K.’

‘If we wanted to shave $10 to $15K from the above, Deloitte could prepare a debt defense report that we could use if HMRC later challenged the appropriateness of the interest deduction claimed in the UK that this structure creates. In my professional opinion this would not be the way to go.

At this juncture Deloitte has indicated that obtaining the ATCA would be fairly straightforward.

[Option 1] This would give us assurance that the future deductions would be honored and would eliminate any current or future FIN 48 issues being raised by E&Y.

[Option 2] The less costly approach would not provide the same level of comfort from a HMRC audit risk perspective. E&Y may also raise the FIN48 Issue since they may be reluctant to accept Deloitte’s debt defense report being MLTN’. (sub-paragraphing and italics added)

‘The first full year anticipated income tax savings in the UK would be approximately 13 times their fee quote (conservatively computed as follows: $500 million *4% *23%). In addition we would have net state income tax savings inuring to JTI conservatively estimated to be somewhere in the range of $300 to $500K per year.’

II. Implementation of the idea: from ‘Skinny’ to Workplan

Informing Joy UK of UK newco: O’Brien to Kisten (of Joy UK) - 6 June (9:50am)

‘With the acquisition of LeTourneau we have identified an acquisition structure that will provide Joy UK with some fairly substantial prospective tax savings.’

‘The new UK entity (Eversheds will be providing us with its formal name later today or tomorrow) .. and will include [Kisten], Mike Mannion and Mike Olsen as directors. Eversheds is working up the documents to form the UK entity and may contact you . for information needed to make you and Mike Mannion directors.’

UK company secretary advised of UK Newco: Krueger to Leith - 6 June (4:49pm)

‘Just a heads up, in case you didn’t already hear. We are forming a new UK company (probably tomorrow) to handle our acquisition of LeTourneau. See the attached step plan from Deloitte.

. Eversheds is doing the heavy lifting on the formation. I have let them know you should be nominated as company secretary.’

Draft Workplan for status update: O’Brien to Eversheds & Deloitte team - 7 June (15:43)

‘Deloitte UK will coordinate with JGI Tax and Eversheds to prepare package of information on the investment opportunity being considered by [JTIAC]. Board agenda and proposed

minutes being progressed by Eversheds. Draft of Note for Step 6 needs to be included in this package. ’ (underlining original)

‘Corporate Treasury, working with Corporate Tax, will draft loan agreement. Deloitte UK will provide a sample note with preferred terms from a UK perspective.’

‘Eversheds will take the lead in drafting this note using terms similar to those provided by Deloitte UK for Step 5. Terms should be such that the note can be listed as a Eurobond. Note will be denominated in USD. Final interest rate to be determined. Loan must be registered as a Eurobond by the time of the first interest payment.’ (italics added)

‘Corporate Treasury, working with Corporate Tax, will draft loan agreement.

Deloitte UK has provided a sample note as guidance.’

UK elements update: Tither to O’Brien/Olsen etc & Deloitte US - 7 June (UK 12:09pm)

‘The documentation ... (being presentation given to the Board of Directors, prepared by Merrill Lynch, to support the business case for the transaction, and the LeTourneau company presentation) should be included in the board pack to help the directors of [JTIAC] to make a fully informed decision to proceed with the acquisition. ..’

‘Are you aware that all of the board members of [JTIAC] are employees of ours? They are well informed on our intentions and, as a matter of fact, one is Joy Global’s CFO [i.e. Olsen] and a contributing architect of this plan. He is one of the two “senior management” that is updated by Pat [i.e. O’Brien] on a nightly basis.’

‘I’m not really in favour of presenting more paperwork to them, especially in such a formal manner. ..

I would like to dispense with the formality of providing a board packet.’

The jot-down list of concerns: Willis to Kisten/O’Brien/Wagner/Tither - 8 June

‘1) Worldwide debt cap (we are currently trying to reduce net debt in all UK companies)

Investments 1,100M

Loans 1,050M

Share Capital 50M

The interest will be charged on the loan which will make the reserves negative - then there will be a dividend block. Am I missing something?’

‘A lot of these questions are driven by the UK’s concern in changing profile to a more aggressive structure. We went through something similar in a recent Australian transaction where Deloitte’s Australian team had to do some hand holding on these types of questions/issues... ’

Tax Planning Matrix not to go into Board Pack: Wagner to Leith/Deloitte - 10 June (3:16pm) 55. In accordance with Step 1(d) in O’Brien’s Workplan (§49(1)), Leith was putting together the ‘Board Pack’, which contained the documents and information prepared by Deloitte UK, JGI Tax, and Eversheds for the first board meeting of JTIAC. On 10 June (3:06pm) Leith emailed the Board of Directors of JTIAC with two zipped attachments. The body of text set out the contents of the Board Pack, to cover two areas regarding: (a) Incorporation Resolutions, and (b) Allotment, Financing, and LeTourneau Acquisition Resolutions.

‘I do not think we should include the “Tax Planning Matrix” from Pat O’Brien should be included [sic] in this correspondence. Assuming Deloitte agrees I will ask that you please re-send this email without that attachment.’

Tax Planning Matrix re-surfaced to check the ‘math’: Hodgetts to Kulasa - 13 Nov 2012

‘Matt, attached is the tax planning document that was circulated at the time of the incorporation of JTIA - I calculate that the saving of having it in the UK is actually $3.8m rather than the $6.8m on the document. I just wanted to check with you as I have put $3.8m per annum in the justification.’

Tax Planning Matrix - LeTourneau Acquisition - Estimated Tax Savings Using 5% interest rate

As a follow up to today’s call, attached is the summary of the [sic] tax planning and “the math” supporting estimated annual global tax savings which would inure to the benefit of our organization as long as the debt structure remains in place. Of course the actual tax savings will hinge on the interest rate that is used for the intercompany transactions. For now we are estimating the interest rate to be 5%.’

[JGI] will acquire [LTT] and its subsidiary group for approx. $1.1billion.

[LTT] and subsidiary group primary manufacturing facilities are in the USA.

[LTT] and subsidiary group sell product throughout the world.

[LTT] and subsidiary group sell product throughout the world.

[LTT] and subsidiary group manufacture OEM and parts for two key segments, mining and oil drilling.

The funding of [LTT] will be a combination of US cash and US bank borrowings.

Tax Planning Structure

[The 9-Step Plan as presented in the ‘Skinny’ email]

At the end of the day the structure is as follows

JGI’s investment in JTI will have increased by $550 million

JGI has a loan receivable from JTI in the amount of $550 million

JTI has a $550 million investment in UK Limited

JTI has a $550 million investment in Cayman Islands Finance Company

UK Limited [JTIAC] will have a loan payable to Cayman Islands Finance Company.’

‘Assume interest rate on all debit within the structure is 0.05 [i.e. 5%]

Assume UK tax rate is 23% on a prospective basis

Assume US federal income tax rate is 35%

Assume JTI US state income tax rate is 2% and

JGI US state income tax rate is 0%

Functional currency throughout global structure is USD

The ‘math’ as projected by O’Brien on 7 June 2011

‘Draft Minutes attached. Including Banking Resolution (JGI Standard Banking Resolution giving JGI officers permission to create and arrange bank accounts for JTI Acquisition Co (2011) Ltd. Previous consent given.’

Draft Board Meeting Minutes: Krueger to Leith/Eversheds - 15 June (4:34pm)

‘As you are aware, [JTIAC] has been presented with the opportunity to acquire the shares of [LeTourneau]. As you contemplate this opportunity, and the benefits this acquisition could provide to [JTIAC], it is important that you consider this transaction on its own merits only and not give consideration to any broader benefits that may be derived by the group of the companies owned by Joy Technologies Inc.’

Minutes of the Board Meeting held in US-Milwaukee 20 June 2011 at 6:30am

Share capital allotment - $50m: Step 4 of Skinny

Quasi-equity (interest free loan) - $500m: Step 5 of Skinny

Intercompany debt - $550m interest bearing loan notes: Step 6 of Skinny

beginning October 15, 2011 ... ’ (clause 1.1 amongst others definitions).

Assignment of JGI’s Stock Purchase Agreement to JTIAC to acquire LTT

‘. (without the consent of Seller) Buyer may assign this Agreement in whole or in part to any of its Affiliates (including, without limitation, Buyer’s right to acquire the Longhorn Stock); provided further that no such assignment shall release the assignor from any of its obligations hereunder.’

Flow of funds to complete LTT acquisition

‘We write further to the deed (“Deed”) dated June 21, 2011 constituting the Loan Notes. . pursuant to clause 8 of the Deed, Joy Technologies Inc. .. has transferred US$550,000,000 Loan Notes (being its entire holding of Loan Notes) and its rights to interest accrued thereon (US$3,100,350 at the date of transfer) to Joy Global Cayman Finance Limited.’

Post-acquisition responses/ reporting/ governance issues

‘1. [JTI] is a wholly owned subsidiary of [JGI]. Joy Global Inc is the publicly traded entity (JOYG) which operates as a holding company.

Tax

Treasury Management

Operating Model

III. Directors' concerns about corporate governance - March 2012

Advance Thin Capitalisation Agreement - 2 November 2011

‘.. [to] provide confirmation that the loan notes issued by JTI AcqCo to JTI in the amount of $550m, and subsequently contributed by JTI to JGCFL, can be considered to be at arm’s length for the purposes of the UK transfer pricing legislation contained at Part 4, TIOPA 2010 and that the interest arising on this debt will be deductible for tax purposes in the following accounting periods, provided the following covenants are met:

Year ended 31 October

2011

2012

2013

2014

2015

Interest Cover (EBITDA: Net Interest)

2.5x

3.0x

3.5x

4.0x

4.0x

Leverage (Net Debt: Equity)

1.5x

1.25x

1.0x

1.0x

1.0x

Interest /Dividends in relevant accounting periods

‘Please bear in mind that we do not want any deductible interest for the UK FY 11 filing as this would cause the UK tax rate to be less than that which was used for the purposes of determining the US FY 11 foreign tax credit. This was communicated to E&Y US and E&Y UK tax groups during FY11 close.’

Enquiry to closure notices

‘The following comments are without prejudice to our primary position ... that JGI’s decision to incorporate a holding company at UK level is not relevant to determining the statutory question at hand. ..’

‘. Debt was expected to serviced by paying dividends up to the UK company. . There would also be earnings from the acquired group . Post-acquisition, however, [LTT] produced less cash than had been originally forecast .’

‘We would again emphasise our view that any decision made at group level to incorporate a holding company in the UK is irrelevant to the question of whether JTI [sic should be JTIAC] had an unallowable purpose. .’

‘. Mr Doheny was asking board directors not to consider any broader benefits and to consider the transaction on its own merits, so the motive for raising this question is not understood.’

‘There were periodic (quarterly) board of director meetings where updates on the [LTT] acquisition/performance were provided and discussed. .’

‘There was no dividend block. .Excess cash of JTI was swept to JGI . in the normal course of cash management, with JTI carrying a note receivable. No value was stripped out of the entity that would hinder any ability it otherwise would have had to service this debt. There were accordingly no reasons to pay any dividends up.’

‘In January 2017, the loan was assigned to a Barbadian-based entity (Joy Global China Holding SRL). The loan was repaid by December 2017. There was no tax benefit generated as the UK entity was not generating taxable income (interest payments would otherwise have been deducted).’

‘HMRC can find no evidence that what the directors were seeking to achieve as a result of the expenditure included a main business or commercial purpose.’

‘HMRC considers that the amounts of Non-Trade Loan Relationship (NTLR) debits included by [JTIAC] in its company tax returns in respect of the loan relationship which existed between [JTIAC] and Joy Global Cayman Finance Ltd in each of the periods, including this one, fall to be disallowed in full. As such, these NTLR debits cannot be brought into account in [JTIAC] for corporation tax purposes under S441 CTA 2009.’

Olsen’s witness evidence

On the proposal being a ‘group policy’ and ‘intercompany transaction’

Q: ... on the precise terms it was offered which is with the particular borrowing and on the understanding that you would then surrender the tax debits and various elections would be made, you were conscious of the fact that by taking the assignment, a benefit would be conferred to the other members of the UK group?

A: Based on the Deloitte material, yes. (172)

Q: .. .that ‘Joy Global does it all the time to consider the wider group benefit as a factor in taking a decision’; that ‘you can’t ignore the fact that the [Appellant] company is a member of the group?’

A: Right, once again I will go back to the point made earlier: Joy Global would not allow tax to drive the strategic decision-making but at the same time, Joy Global will do everything in its power to exercise transactions in the most tax efficient process.

Q: As a director of the Appellant, you knew and understood that as a group policy?

A: It’s not only a group policy, but it would be a policy for all of the Joy Global entities around the world, and once JTI Acquisition came into play, it was also their driver, to be as tax efficient as possible.

Q: And that included the benefit of the other members of the UK group?

A: That’s correct.

Board meeting decisions as the culmination of a process of thinking and consideration

Q: .. that the board packs were put together for presentational issues. So they didn’t want the board resolution, the minutes, to record that you had had the tax matrix in front of you. That is what this email suggests? (171)

A: ... Paul was a middle tax manager and I am not sure what his thought process was, but certainly the Deloitte proposal was known by Wayne [Kisten] . being the CFO, he certainly would have been aware of the Deloitte material. (172)

On whether 7 steps or 9 steps in the plan

A: I guess I wouldn’t characterise myself as being happy to stop at step 7, .

our objective was relative to where the debt was, you literally could stop at point 7 . I was looking at it from the perspective of placing debt outside the US. .

A: No, I don’t think that the nine-step plan was ever discussed as the alternative of stopping at step 7. .

Replies on being cross-examined on email exchanges

I think it is hard to interpret what somebody was thinking whenever they communicated. But in this instance, I wouldn’t come away from this saying that she believed that the UK company was strictly driven by tax rationale.’

‘. Once again, ... Vicky Willis is a group accountant. I am not even sure if Vicky Willis was in the UK tax department, and so I think a lot of the issues that Vicky is raising are Vicky Willis’s issues.’

‘... So, I think the issues that Vicky raises were probably very valid concerns on her part and had to be addressed.’ (underlining added)

To the question that the UK group ‘regarded this as an aggressive and rather unappealing transaction’: ‘Well, once again, was it the UK group or was it Vicky Willis?

Non-tax-advantage considerations for choosing a UK company to acquire LTT

Q: .. the closing of this agreement .. pretty much by five days .. [when] all the work [under Article 6] should really have been done under this May 2011 agreement. So all of the work behind the scenes necessary for those representations and warranties and covenants to be given. That would be quite a considerable amount of work presumably, about the financial status of the company .

A: You are talking about the due diligence?

Q Yes. . all the representations made about the group being purchased and the purchaser, that they are all true. So things have to be evidenced; the due diligence. All that work would have been done, or the obligation waived five days before closing?

A: According to this agreement, that is correct.

Q: And all of that work would have been done either by Joy Global or teams at its direction?

A: Yes. The due diligence would have been done by the various functions of Joy Global . treasury function . tax function . comptrollership organisation . environmental issues . a whole functional team put together to go through this due diligence exercise.

A: The sale between Rowan and Joy Global -

A: - was locked into place. (114)

A: The issue now was where was Joy Global going to assign the agreement. . those directors [of the Appellant on 20 June] . had the ability to say stop.

And they had no obligation to Rowan at this point in time. (114)

Q: And if they had done that on 20 June, Joy Global would have taken as the transfer of [the LTT] stock. It would have had to, wouldn’t it -

A: Not sure. Not sure. My guess -1 shouldn’t say guess, but my assumption would be that Joy Global would then have looked to another of its non-US entities to proceed with their agreement „.’ (115)

Q: But it would be one that was pre-existing?

A: No, not necessarily. ... there is almost always an entity that is created to complete the acquisition. (115)

Q: ... But [the assignment form JGI to the Appellant] was done on closing date, so it was just to make sure that nothing would disturb the main transaction if you like, between the group and Rowan.

A: Yes, I don’t recall that, but that certainly seems logical. (175)

Q: You didn’t make the decision in a vacuum, did you? .. you paid over ^ of a million in fees, you knew that if the company agreed to take the assignment and take the precise funding on offer, and to do . steps 1 to 9, it would give the group the benefit that everyone had gone to all this trouble in preparing and paying fees for. You knew, didn’t you, that you would get that benefit for the group? (166)

A: That certainly was one of the outcomes of the decision to acquire LeTourneau. The best outcome of acquiring LeTourneau was the business rationale for the acquisition. But this certainly was one of the outcomes. (166)

A: We are going to spend $1.1 billion and this tax piece is going to save a couple of million dollars. So the important part of the [LTT] acquisition was what it was going to be from a synergy perspective on our surface equipment business, as we had to compete with a significantly larger competitor in Caterpillar. The important piece . was to get the product that LeTourneau brought with the acquisition. . The tax piece was an element of the decision process after we decided where the acquisition was going to reside. . Hindsight is always 20/20, but my suspicion is that [suppose] there was none of this [query] of US benefit down the road, we probably would have done exactly the same thing, because the key element was where was that debt going to be placed. (124-125)

A: .. I guess to summarise, my understanding is that in order to make sure that all of the debt associated with the acquisition of LeTourneau did remain [sic?] in the US, Joy Global made the determination that the acquisition was going to be executed outside of the US. (121, underlining added)6

A: The reason we wanted the debt to be outside the US was we had accumulated all ofour borrowings in the US. We had a significant acquisition on the horizon with IMM and we just wanted to be able to diversify our borrowings of the global company. (187-188)

tax by holding assets in non-US subsidiaries (183-184) -

Q: . the repatriation argument doesn’t run. The Deloitte plan . doesn’t give you that repatriation benefit?

A: I don’t know the answer to that. I can’t imagine that Deloitte would come up with a proposal that would put Joy Global at a tax disadvantage.

Q: Well, it didn’t. It absolutely preserved all of the US tax advantage that would come with a US company buying LeTourneau, but it added a UK tax deduction. . the US group got all of the commercial benefits of acquiring LeTourneau. It preserved all its US benefits but it just added on this UK benefit?

A: I am actually not familiar enough with the tax laws to actually address the point you are making....

Judge: . If there are other kind of strategic reasons for placing an entity in a specific jurisdiction, because you said tax is secondary and it is always the strategic reasons for making the plan, so what is behind that thinking in choosing the UK jurisdiction then?

A: My suspicion - once again, we are talking about a decision that took place 10 years ago but certainly part ofthat decision process was probably the ease of incorporating a new company in a particular jurisdiction. That was probably part of it. As I had mentioned, we had a significant critical mass in the UK and so those were the factors that were probably driving the decision to have this acquisition corporation established in the UK.

Appellant’S case

‘The purpose of that application [i.e. ATCA] was to confirm the “deductibility of interest arising on related party debt provided to [JTIAC] by [JTI] to facilitate the acquisition of LTT.’ (italics original)

HMRC’S CASE

Discussion

The burden of proof

First issue: the ‘unallowable purpose’ test

The construction of the statutory test under s 442

For the purposes of subsection (1) the tax avoidance purpose is only regarded as a business or other commercial purpose of the company if it is not -

negated if the tax avoidance purpose is neither the main purpose, nor one of the main purposes. The focus of the fact-finding exercise moves from whether the tax avoidance purpose is any or one of the purposes (pertaining to the first two conditions) to the qualifying descriptions of ‘not’ and ‘main’ as pivotal to establishing the negative condition.

Was there a tax advantage?

‘The material question is not what was the effect of each or all of the interrelated transactions, the question is what was the main object or objects for which any of them was adopted. Section 28(1) of the Act draws a clear distinction between effect and object. It was to this latter question that the

Special Commissioners rightly directed their attention. To do so they had to consider each particular transaction in the series in its proper setting.’

‘Admittedly, an object of the carrying out of the broad scheme by way of the resolutions was a tax advantage. But that which had to be ascertained was the object (not the effect) of each interrelated transaction in its actual context and not the isolated object of each part regardless of the others. The subsection would be robbed of all practical meaning if one had to isolate one part of the carrying out of the arrangement, namely, the actual resolutions which resulted in the tax advantage, and divorce it from the object of the whole arrangement. The method of carrying it out was intended as one part of a whole which was dominated by other considerations.’

Appellant’s contentions

Was securing the tax advantage a purpose?

The nexus of the purpose test

‘[38] ... Paragraph 13 Sch 9 FA 1996 directed attention to the purposes for which the company was party to the loan relationship. It must therefore be correct to ask for what purposes the company was party to that relationship or, in other words, for what purposes it held the relevant shares rather than what the company’s purposes were in bringing about and maintaining the satisfaction of the conditions in s 91B(1).’ (italics original)

Finding the ‘subjective’ object of the directing minds

‘The “object” which has to be considered is a subjective matter of intention. It cannot be narrowed down to a mere object of a company divorced from the directors who govern its policy or the shareholders who are concerned in and vote in favour of the resolutions for the increase and reduction of capital. For the company, as such, ... cannot form an intention. Thus the object is a subjective matter to be derived in this case from the intentions and acts of the various members of the group. And it would be quite unrealistic and not in accordance with the subsection to suppose that their object has to be ascertained in isolation at each step in the arrangements.’

‘. the purposes for which the company ..

‘If the interests of all there companies were considered together when the vital decision was made, then JLT’s and Properties’ interests must have been considered at the same time as Carpets’, . it must in the nature of things be extremely difficult for any directors of two associated companies in the position of Carpets and JLT to be certain in whose best interests - or, rather, in whose exclusive interests - any step which they take is being taken. . In my judgment, Commissioners should be extremely slow in coming to any conclusion that the act was done solely for the benefit of the trade of one of the companies concerned and should in general do so only where there are separate finding of primary fact not depending on the say-so of the directors concerned...’

‘In the case of an individual taxpayer, the other purpose is usually a private purpose of his own. In a case like the present where the taxpayer is a company forming part of a group, the other purpose is likely to be the purpose of the trade of one or more of the other companies in the group.’

‘. A “subjective” test does not equate to adopting whatever the appellant asserts to be his intentions as the factual state of affairs without further examination. A legal test that is “subjective” means that the fact-finding tribunal is required to take into consideration the specific set of circumstances, the personal attributes, or the peculiar mindset of the person in question, namely the appellant in the present case.

The contrast to a subjective test is to find the objective standards and attributes of the hypothetical, ordinary and reasonable person: ‘the man on the Clapham omnibus’. When Stuart-Smith J [in Flockton7] referred to the business motive test as a “subjective” test, he was saying that the purpose in incurring a particular item of expenditure is to be found with regard to the personal attributes and mindset of the person in question, and not by reference to the objective purpose of the man on the Clapham omnibus.’

Findings of fact for the purpose test

Was the tax avoidance purpose not the (or a) main purpose?

‘The object of the taxpayer in making the payment must be distinguished from the effect of the payment. A payment may be made exclusively for the purposes of the trade even though it also secures a private benefit. ... if securing the private benefit was not the object of the payment but merely a consequential and incidental effect of the payment.

Although the taxpayer’s subjective intentions are determinative, these are not limited to the conscious motives which were in his mind at the time of the payment. Some consequences are so inevitably and inextricably involved in the payment that unless merely incidental they must be taken to be a purpose for which the payment was made.’

‘The primary inquiry is to ascertain the particular object which the directors sought to achieve by it. Once that is ascertained the characterisation of the object as serving the purposes of the trade of one particular company or another is not a finding of primary fact, but a conclusion based upon the primary facts.’

‘[the taxpayer] did not dispute that [the transaction] had as a main purpose securing a very large tax advantage .. the hoped-for gain was large both in absolute terms (more than £70m) and relative to the apparent value of TDS (some £280m). .. the inescapable inference was that securing the advantage had become a main purpose of holding the shares. .’

‘. unless he shows that the transaction or transactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments, and that none of them had their main object, or one of their main objects, to enable tax advantages to be obtained.’

‘On a consideration of all the evidence before us we found that the transactions in question had been entered into for bona fide commercial reasons. We also found that though admittedly a tax advantage had been obtained this advantage was an ancillary result of the main object, which was a bona fide commercial one, and the transactions in question did not have as their main object, or one of their main objects, to enable tax advantages to be obtained.’

What evidence of business or commercial purpose?

The positive case that obtaining the UK tax advantage was the main purpose

‘Provided that companies are funding commercial activities or investments in a commercial way, they should have nothing to fear. If they opt for artificial, tax-driven arrangements, they may find themselves caught’.

Second issue: the attribution test

‘I believe that the answer to all of these submissions lies in the words of para

13 [Sch 9 FA 1996]. The UT was required to assess how much of the debit was, on a just and reasonable apportionment, attributable to the unallowable purpose for which the bonds were held. I am content to assume that Fidex would have held the bonds from the start of 2005 irrespective of the unallowable purpose but that is nothing to the point. The question is whether and to what extent the debit was attributable to the unallowable purpose for which they were held. I agree with the UT that the answer to this question is quite clear. The debit arose from and was entirely attributable to Project Zephyr [with tax avoidance purpose inherent]. But for this avoidance scheme there would have been no debit at all.’

Disposition

Right for permission to appeal

DR HEIDI POON

TRIBUNAL JUDGE

Release date: 19 April 2022

Amended before publication on 23 May 2022 pursuant to Rule 37 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 to remove typographical slips and omissions.

ANNEX 1

STATEMENT OF AGREED FACTS9

of 22 paragraphs

Rowan Companies Inc relating to the acquisition of LTT; and

period to 31 October 2012    £14,907,875

31 October 2013    £8,797,516

31 October 2014    £11,052,170

31 October 2015    £5,293,215

of JGI.

accounting periods ending 31 October 2012, 31 October 2013, 31 October 2014 and 31 October 2015. The returns were amended to disallow the debits claimed by JTIAC representing interest payable under the loan notes.

The authorities are listed chronologically with their short case references emboldened in brackets.

2770 (Lloyds TSB Equipment Leasing- CA)

ANNEX 3

ANTI-ARBITRAGE PROVISIONS IN OUTLINE

The anti-arbitrage provisions in outline under Part 6 TIOP 2010

234 Schemes achieving UK tax advantage for a company

ANNEX 4

The flow of funds in the ‘global tax planning’ idea as implemented

Diagram 1: Funds flow in Step 0 to Step 3

Step 0: Bank (third-party) advanced a loan of $500m to Joy Global (JGI).

Step 1: Joy Technologies (JTI) formed a new UK Ltd Co., the Appellant (JTIAC).

Step 2: JGI contributed $550m to JTI (as equity).

Step 3: JGI loaned $550m to JTI (as interest bearing note).

Diagram 2: Funds flow in Step 4 to Step 7

Step 4: JTI contributed $ 50m to the Appellant (as share capital).

Step 5: JTI transferred $500m to the Appellant (as quasi-equity) in exchange for a dollar-denominated non-interesting bearing note.

Step 6: JTI loaned $550m to the Appellant (to be listed as a Eurobond in the Cayman Islands).

Step 7: The Appellant acquired LeTourneau for $1.1billion cash.

ANNEX 4 (continued)

The flow of funds in the ‘global tax planning’ idea as implemented

Step 8: JTI formed Joy Global Cayman Finance Ltd (JGCF).

Step 9: JTI re-assigned the $550m loan note (see Step 6) to JGCF.

ANNEX 5

Appellant’s Diagram with the title:

‘Transactions Summary reflecting the transactions of 21 and 22 June 2011’

Excerpts from Hansard, Commons Debates, 28 March 1996, Columns 1190-1193

‘Paragraph 13 of the schedule disallows tax deductions to the extent that tax avoidance is the main motive behind a loan relationship. We have been told of concerns that this could be interpreted as preventing companies from getting tax relief for legitimate financing arrangements. I am happy to offer a reassurance that this is not the intention of the legislation. ..

We have been asked whether financing - which, for example, is to acquire shares in companies, whether in the United Kingdom or overseas, or to pay dividends - would be affected by the paragraph. In general terms, the answer is no, but the paragraph might bite if the financing were structured in an artificial way.

It has been suggested that structuring a company’s legitimate activities to attract a tax relief could bring financing within this paragraph - some have gone so far as to suggest that the paragraph might deny any tax deduction for borrowing costs. These suggestions are clearly nonsense. A large part of what the new rules are about is ensuring that companies get tax relief for the cost of their borrowing. [.]

Provided that companies are funding commercial activities or investments in a commercial way, they should have nothing to fear. If they opt for artificial, tax-driven arrangements, they may find themselves caught’.

1 Ms Wilson’s skeleton argument at [62]: ‘The Appellant candidly refers to the fact that it served 17,000 unindexed and unsorted documents on HMRC in purported compliance with HMRC’s requests for disclosure.....The Appellant’s conduct might have been relevant to costs had the Appellant not opted out of the cost regime, ...’

2 CRM stands for ‘Customer Relationship Manager’ and is an HMRC officer assigned to a corporate group to liaise with the Senior Accounting Officer (‘SAO’) of the taxpayer company. The SAO regime is intended to be constructive and pro-active in identifying and resolving any potential issues under all heads of tax, including tax risks. (See Castlelaw (No. 628) Ltd & Anor v HMRC [2020] UKFTT 34 (TC) at [15]).

3 All three directors were appointed on 8 June 2011. Mannion retired on 21 May 2012; Kisten retired on 15 November 2012; and Olsen retired on 1 February 2013,

4 Transcript Day1/175-176 during cross-examination of Olsen; signatures on p356 (Loan Note Instrument 925), and p359 (Note No. 923).

5 See §74, the John David Major as the Director of JGCF would be ‘the same guy’ as Sean D or John D Major.

6 By email dated 24 March 2021, Mr Harry Williams of HMRC asked Opus as the provider of the transcribing service for these proceedings to check the recording that there was a ‘Not’ missing in Mr Olsen’s statement at 121/line10 as in ‘all of the debt associated with the acquisition of LeTourneau did [NOT] remain in the US’. Opus confirmed that the word ‘Not’ was not used in Mr Olsen’s oral evidence.

7 Ian Flockton Developments Ltd v Customs and Excise Commissioners [1987] STC 394.

8 Hansard, Commons Debates, 28 March 1996, Columns 1190-1193.

9 For the avoidance of doubt this document is not a full statement of all the facts which HMRC regard as relevant to the issues in this appeal and it is subject to any findings made by the Tribunal.

10 The interest on the loan notes is charged using the one-year Libor rate plus 3.5 per cent per annum payable in arrears and the loan notes are redeemable on 21 June 2021.


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