A recent UK tax tribunal decision, relating to the UK corporation tax treatment of a “tower” structure, serves as a useful reminder of the limitation of tax rulings.
In 2013, Oxford Instruments needed to refinance its US sub-group. With its tax advisors, Oxford considered a number of options, including the use of a financing subsidiary with the benefit of the UK’s CFC partial exemption and a tower structure.
Oxford agreed with its advisors that, if HMRC granted a clearance under the UK's anti-arbitrage rules for the tower structure, this would be its preferred option. The anti-arbitrage rules potentially applied to the tower structure if a main purpose of the scheme was to achieve a tax advantage for UKCo.
The clearance application was duly submitted, and HMRC granted a clearance on the basis that the taxpayer would voluntarily disallow 25% of the interest deduction arising under the structure, so that its UK tax position would be aligned to the 25% CFC tax pick-up under the comparable CFC financing subsidiary structure (to which the anti-arbitrage rules did not apply).
To UKCo’s surprise, HMRC subsequently challenged UKCo’s interest deduction under another avoidance provision, s441 CTA 2009, on the basis that a main purpose of UKCo being a party to the loan was to secure a tax advantage for UKCo. HMRC had included a statement in the anti-arbitrage clearance that it “did not provide clearance in respect of any other avoidance provision.”
The Tribunal agreed with HMRC. It concluded that, whilst the scheme as a whole might have good commercial purposes – the financing of the US business - these commercial purposes were all satisfied without UKCo becoming a party to the loan, and therefore a main purpose of the loan was to secure a tax advantage. As the test under s441 was different to the anti-arbitrage test (it looked at the purpose of the loan rather than the purpose of the scheme in its entirety), it was not inconsistent for the anti-arbitrage rules not to apply but for s441 to apply.
The Judge also noted that the later challenge arose because of change of view within HMRC as to the application of s441 to tower structures. In other words, when the anti-arbitrage clearance was given, HMRC had not intended to mount a s441 challenge.
whilst the scheme as a whole might have good commercial purposes...a main purpose of the loan was to secure a tax advantage