This decision considers further the application of the unallowable purposes rule.
The Upper Tribunal has dismissed the taxpayer’s appeal in a recent case concerning the unallowable purposes rule. The taxpayer group had claimed a deduction in respect of the reduction in fair value of a shareholding in a group company which was deemed to represent a loan relationship. The deeming arose because the shares, in combination with a total return swap, were designed to produce an interest-like return. The First-tier Tribunal determined that the unallowable purpose rule applied to not only deny relief for this deduction (which was the intended benefit) but also for the interest debits in respect of borrowings transferred as part of the arrangement. The Upper Tribunal has now upheld that decision. Although the facts are specific to the particular arrangement, the decision provides useful guidance as to how the Courts will apply the unallowable purposes rule.
This case (PDF 127 KB) tells us a number of things about the unallowable purposes rule:
There have now been at least seven Court decisions which have considered the unallowable purposes rule and this decision further illustrates the need to carefully consider the requirements of the legislation as interpreted by this line of case law.
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