NTLR debits on $4 billion loan disallowed due to unallowable purpose

In HMRC v BlackRock Holdco 5, LLC [2022] UKUT 00199, the Upper Tribunal (UT) held that loan relationship debits claimed as part of an intra-group financing arrangement were wholly attributable to the unallowable purpose of the lending and not the commercial purpose and were denied.

• The BlackRock group acquired the North American investment management business of Barclays Global Investors (BGI US) from Barclays Bank in 2009.
• As part of the deal, the appellant, BlackRock Holdco 5 LLC (LLC 5), was created as part of the acquisition structure and claimed Non-Trading Loan Relationship (NTLR) debits on $4 billion of loan notes received from its parent company, BlackRock Holdco 4 LLC.
• HMRC amended the tax return disallowing the debits on the basis that the loans were not arm's length under the Transfer Pricing (TP) rules. They also had the main purpose of securing a tax advantage, which was an unallowable purpose.
• The First Tier Tribunal (FTT) found that there was also a commercial purpose behind the loans and that they would have been advanced even without a tax advantage. The tax advantage did not increase the level of debits, so it was just and reasonable to apportion all of the debits to a commercial purpose.
• The FTT also held that a third party would have entered into the loans, albeit with certain caveats, allowing the loans to meet the TP requirements.
• On that basis, the FTT allowed the deductions in full.
• HMRC appealed the decision to the UT on the basis that the FTT had erred in law in both finding the loans to be arm's length and that they had a commercial purpose at all. HMRC also argued that even if there was a commercial purpose, it was not just and reasonable to apportion all of the debits to it.

The UT found that:

• Any such loan made on an arm's length basis between two independent enterprises would only have been made subject to certain provisions that were not present in the actual loan. The actual loan conferred a potential UK tax advantage on LLC5 and so the transaction had to be recalculated using arm's length provisions. In a third party scenario, no such loan would have been made and so the debits were disallowed from a TP perspective.
• The disallowance of the debits under the arm's length provisions rendered any decision on the unallowable purpose immaterial, but the grounds of both parties' arguments were heard and decided upon.
• The FTT did not err in law in finding that the loans had both a commercial and an unallowable tax advantage purpose.
• The FTT did err in applying the just and reasonable apportionment on a subjective basis when it should have been an objective one.
• The acquisition structure chosen by the group, and hence the creation of LLC5 and the subsequent loans, would not have been used if there had not been a tax advantage. As such, the commercial purpose would not have occurred if not for the tax purpose and all of the debits were attributable to the unallowable purpose.

The UT allowed the appeal on both counts and the deduction of the NTLR debits was denied.

Useful guides on this topic

Loan Relationships
How are loans made to and by a company taxed? What are the rules when loans are written down? What is the difference between a trading and non-trading loan relationship? What are the rules for connected party loans? 

Loan relationships toolkit: Is a balance within the rules?
When does a balance fall within the loan relationship rules?

Losses: Trading and other losses
When can a company offset its losses? What restrictions are there? How are loss claims made?

External link

HMRC v BlackRock Holdco 5, LLC [2022] UKUT 00199