In a case which illustrates the likely approach courts and tribunals will take to anti-avoidance legislation, the First-tier Tribunal (FTT) has found that a holding company's non-trading loan relationship deficits could not be set off against its profits in later accounting periods.
The holding company had accumulated non-trading loan relationship deficits over a number of years, primarily because interest it paid on a bank loan was greater than interest it received from a subsidiary company. Shortly before the end of the 2015 accounting year, it made a new loan to the subsidiary, using the proceeds of a dividend it had received from it. The holding company made profits over the 2016-2019 accounting years and sought to use the carried-forward non-trading loan relationship deficits against those profits. HM Revenue and Customs (HMRC) rejected this treatment, citing Section 730G of the Corporation Tax Act 2010, which is intended to prevent tax avoidance involving carried-forward losses. The holding company appealed to the FTT.
It was accepted that the new loan to the subsidiary constituted a 'tax arrangement' for the purposes of Section 730G. However, one of the conditions in Section 730G is that a company must have 'relevant profits' arising as a result of tax arrangements. The holding company contended that this meant that all of a company's profits in the relevant year must be the result of tax arrangements, so the fact that it received interest from other sources that were not part of the tax arrangement meant that Section 730G did not apply. Alternatively, it argued that the restriction on use of carried-forward losses should not apply to its profits that did not arise from the tax arrangement.
The FTT agreed with HMRC that Parliament's intention was to prevent profits arising from tax arrangements from being sheltered to any extent by carried-forward losses. It noted that, if Section 730G could only be engaged where a company's entire profits arose from tax arrangements, there would be no need for a concept of 'relevant profits'. On a purposive construction of Section 730G, the provision applies where a company has profits resulting from tax arrangements, even if it has other profits.
In determining how much of the holding company's profits were relevant profits, the FTT concluded that it was necessary to calculate what the profits would have been had the tax arrangement not been implemented. The holding company would have made no profits in the 2016-2019 accounting years had it not been for the interest received on the loan to the subsidiary. All of the profits in those years therefore arose from the tax arrangement, and the holding company could not deduct from them any amount in respect of its carried-forward non-trading loan relationship deficits. The appeal was dismissed.