CFM38145 | Loan relationships: tax avoidance: unallowable purpose: purposes of activities not within the charge to Corporation Tax: rule and background

CTA09/S442(2)

For the ‘unallowable purpose rule’ (at s441-442) to be engaged, there must be an ‘unallowable purpose’: that is, a purpose for which the company is party to the loan relationship (or enters into a ‘related transaction’, as defined for the purposes of the rule), which is not amongst the business or other commercial purposes of the company.

It is specifically provided that the purposes of a part of a company's activities, in respect of which the company is not within the charge to Corporation Tax (CT), do not count as business or other commercial purposes (s442(2)). This section considers this limb of the test.

Activities not within the charge to CT

In order to apply this test, it is necessary to determine the relevant part of a company’s activities (the relevant activities) and then whether or not the company is within the charge to CT in respect of those relevant activities.

This rule will be relevant, for instance, as regards borrowing in relation to mutual trading activities. Further, where borrowing is for the purposes of non-UK activities that are not brought into the charge to CT, it is HMRC’s view that debits under such borrowing will generally not be available as a result of the interaction of the general rules in the loan relationship regime, the territorial scope rules in CTA09/S5 and S5A, and other tax rules as relevant to the situation (for example, permanent establishment and/or partnership rules). However, were this not to be the case in a particular situation, it is likely that s442(2) will instead apply to disallow the debits.

See CFM38190 for an example of where this rule might apply.

Background

This rule operates principally as a boundary rule, although it may in some circumstances have an anti-avoidance impact.

The policy behind this rule is that it is not appropriate to give relief for financing costs where that finance is used for the purposes of activities which will themselves not be within the charge to CT.