Claim for £6.7 million tax deduction fails.

Posted: 2nd December 2012

HMRCArguments that substantial loans made between companies within the same group gave rise to an entitlement to a £6,690,000 deduction from Corporation Tax (CT) liabilities have been rejected by the Court of Appeal. There was no ‘loan relationship’ between the parties within the meaning of section 81 of the Finance Act 1996, the court ruled.

Through a series of transactions, the taxpayer company had made loans to a linked company based outside the United Kingdom. It was argued that the entitlement to the CT deduction arose when the taxpayer executed a deed waiving repayment of most of the monies. However, the deduction sought was disallowed by the Commissioners for Her Majesty’s Revenue and Customs.

In dismissing the taxpayer’s challenge to previous decisions of the first-tier and upper tribunals, the court ruled that the tax authorities were entitled to ‘look behind the label’ of the purported loan agreements between the two companies to establish the reality as to whether the transactions had in fact involved a lending of money within the meaning of section 81.