The Corporate Tax Planning Law Review: United Kingdom


The United Kingdom is often considered an attractive holding company jurisdiction for multinational groups, combining a relatively low headline corporation tax rate (currently 19 per cent, increasing to 25 per cent from April 2023) with a predominantly territorial tax regime, no withholding tax on dividends and an extensive tax treaty network.

The UK left the EU on 31 January 2020 and the transition arrangements, which postponed many of the legal effects of Brexit, expired at 11pm on 31 December 2020. It is unlikely that we will see significant changes to the overall policy of an attractive territorial tax regime balanced with a robust defence of the tax base. The UK's desire to remain 'open for business' post-Brexit will, if anything, increase. We have witnessed this already, with the introduction of a new tax regime for qualifying asset holding companies and with the government continuing to look to develop an enhanced UK funds regime.

Similarly to many other countries, the UK government introduced a number of fiscal measures to help businesses deal with the impact of the covid-19 pandemic. The vast majority of these measures will not be extended into the 2022–2023 tax year and, increasingly, tax changes to address the cost of measures (both fiscal and non-fiscal) taken by the UK government in response to the pandemic are anticipated (such as an increase in the rate of corporation tax).

Local developments

i Entity forms

Most UK business of any significant size is carried on in a company, which might be either UK resident or the branch of a non-UK company. Partnerships (which are transparent for UK tax purposes) tend to be limited to the professions and to private equity-style investment structures. English law does allow a limited liability partnership, which is more corporate in form but is transparent for tax purposes. It has proved a popular structure for professional services firms. There is no equivalent of the US 'check-the-box' rules.

ii Corporation tax

UK tax-resident companies are subject to corporation tax on their worldwide profits. A company incorporated in the UK will be resident in the UK unless it is treated as solely resident in another jurisdiction under the tie-break provision in a relevant tax treaty. Non-UK-incorporated companies are treated as UK tax resident if their central management and control is in the UK.

Non-UK-resident companies pay corporation tax on profits arising from a trade carried on through a UK permanent establishment (PE). Therefore, if a branch's activities fall short of a trade (e.g., if it is carrying on an investment business), it is not generally subject to corporation tax, although it may be subject to income tax on certain income arising in the UK.

There are exceptions to this general rule. Non-UK-resident companies that are not carrying on a trade through a UK PE can be subject to corporation tax if, for example, their trade consists of 'dealing in or developing' UK land, they dispose of an interest in UK land, or they carry on a UK property business or receive other UK property income.

The current rate of corporation tax is 19 per cent. The rate for larger companies is going to increase to 25 per cent from April 2023. Since 2016, banks have incurred an 8 per cent surcharge on top of the headline rate. This will, however, be reduced to a 3 per cent surcharge from April 2023, in light of the increase in the headline rate; the government's stated intention is to ensure that, notwithstanding the headline rate increases, the combined rate of tax on banks' profits does not increase substantially from its 2022 level. In comparison with corporates, the rates of income tax (paid by individuals and trusts) are considerably higher (up to 45 per cent in most of the UK and up to 46 per cent in Scotland) and individuals pay capital gains tax at rates of up to 28 per cent.

Corporation tax is largely an accounts-based system, with taxable profits being derived from the accounts, although there are some adjustments. For example, accounts depreciation of plant or machinery is not tax deductible. Instead, capital allowances are given at various rates, depending on the type of asset and the level of expenditure incurred. Until March 2023, a temporary 130 per cent super-deduction will be available for companies investing in qualifying new main rate plant and machinery.

Dividend income (whether paid by a UK or a non-UK company) is generally exempt from corporation tax, subject to some complex anti-avoidance rules.

Another significant exemption from corporation tax is the substantial shareholding exemption (SSE), which exempts gains (and disallows losses) arising from the disposal of shares in substantial shareholdings (broadly 10 per cent or more) in UK and non-UK trading companies or groups, where the seller has held a substantial shareholding for a continuous 12-month period in the six years before the date of disposal.

Territorial system

The dividend exemption and the SSE, alongside the lack of withholding tax on dividends and the UK's extensive tax treaty network, have made the UK a popular jurisdiction for group holding companies.

The UK has broadly adopted a territorial tax system, taxing only UK-source income. This means that most dividends received by a UK company from non-UK subsidiaries (and indeed from other non-UK companies) will benefit from the dividend exemption for corporation tax. Although broad in scope, the dividend exemption is not entirely straightforward in its application, and there are various exclusions, such as where the dividend is deductible in another jurisdiction.

Subject to tax treaties and double tax relief, the UK normally taxes profits earned in overseas branches of UK-resident companies. A UK company may, however, elect for the profits (including capital gains) of its overseas branches to be exempt from UK taxation. If this election is made, the UK company cannot then use the losses of the overseas branch. An election is irrevocable and covers all overseas branches of the electing company.

The UK's controlled foreign companies (CFC) regime, which taxes certain undistributed profits of non-UK subsidiaries of a UK company (at the corporation tax rate), at first sight seems inconsistent with a territorial tax system, but the CFC regime is not intended to catch profits that arise naturally outside the UK. Although the rules are complex, their intention is to target profits that are artificially diverted from the UK.

Real estate investment trusts

Since 2007, the UK's real estate investment trust (REIT) regime has enabled qualifying companies to elect to be treated as REITs. The conditions for qualification have been relaxed and simplified, with effect from April 2022, to increase the attractiveness of the UK as a location for property investment. From April 2022, the conditions for qualification will include UK residence, stock market listing (unless institutional investors hold at least 70 per cent of the ordinary share capital in the REIT), diversity of ownership, and a requirement that three-quarters of the assets and profits of the company (or group) are attributable to its property rental business.

The aim of the regime is that there should be no difference from a tax perspective between a direct investment in real estate and an investment through a REIT. Accordingly, a REIT is exempt from tax on income and gains from its property rental business, but distributions of profits are treated as UK property income in the hands of shareholders and are liable to 20 per cent withholding tax (subject to exceptions).

Patent box regime

The UK patent box regime allows an arm's-length return on intellectual property (IP) held in the UK to qualify for a reduced corporation tax rate of 10 per cent. In light of the OECD's Action Plan on Base Erosion and Profit Shifting (BEPS) Action 5, patent income qualifies only to the extent that there is a nexus between the research and development (R&D) activity of the company and the tax benefit derived from the patent box regime. The nexus requirement means that IP must be generated by R&D activities of the UK company itself or by R&D outsourced to third parties. Acquired IP and IP generated by R&D outsourced to associates are not eligible for the patent box.

Where IP has been generated from a combination of 'good' and 'bad' expenditure, a fraction of the patent income qualifies for the patent box.

Now that the UK has left the EU, a further relaxation of the new rules might be possible; the UK might, for instance, decide to treat all R&D outsourcing within the UK as 'good' expenditure.

Equity funding

If a UK company is financed by subscribing for shares, there are no tax consequences for the share subscription but no tax deduction for dividends paid on the shares. The UK does not impose any withholding tax on dividends paid by UK companies, other than dividends derived from the tax-exempt business of a UK REIT (see above).

A repurchase of shares (although not a redemption of redeemable shares) in a UK-incorporated company may be subject to stamp duty at the rate of 0.5 per cent.

Debt funding

In principle, a UK-resident company benefits from relief from UK corporation tax for interest and other financing costs, but this is an area that is subject to continually increasing restrictions.

If the lender is a related party or the borrowing is guaranteed by a related party, arm's-length transfer pricing rules will be applied to determine the amount and rate at which the borrower could have borrowed from an independent lender, and tax follows that arm's-length position. The UK does not have any thin capitalisation 'safe harbours'.

In line with BEPS Action 4, the UK has introduced an earnings before interest, taxes, depreciation and amortisation (EBITDA)-based cap on net interest expense. The restrictions, which apply only where a group has over £2 million in UK net interest expense, include:

  1. a fixed ratio rule that limits deductions for net interest expense to 30 per cent of a group's UK EBITDA, and a group ratio rule based on the net interest to EBITDA ratio for the worldwide group; and
  2. a debt cap that provides that a group's net UK interest deductions cannot exceed the global net third-party interest expense of the group.

Interest treated as a distribution will not be deductible. This includes situations where the interest exceeds a reasonable commercial return, the rate depends on the performance of the borrower or the loan is convertible into shares.

Interest relief may also be restricted where a main purpose of being party to the loan in the relevant accounting period is to obtain a tax advantage.

The UK imposes withholding tax at the rate of 20 per cent on 'yearly interest' – namely interest paid on loans capable of being outstanding for one year or more. This rate may be reduced by an applicable double tax treaty.

In addition, there are various domestic exceptions. There is no obligation to withhold tax if:

  1. the interest is paid by a bank in the ordinary course of its business;
  2. the person beneficially entitled to the interest is a UK-resident company, or is non-UK resident but carries on a trade in the UK through a PE and is subject to UK tax on the interest;
  3. the interest is paid on a quoted Eurobond (i.e., debt listed on a recognised stock exchange);
  4. the interest is paid on debt traded on a multilateral trading facility operated by a recognised stock exchange regulated in the UK, the EEA or Gibraltar; or
  5. the interest is paid on qualifying private placements.

There is also no obligation to withhold tax on 'short interest' (broadly where the loan will be outstanding for less than one year) or on returns that constitute discount (rather than interest).

Stamp duty is not generally payable on the transfer or repayment of 'plain vanilla' loan capital.

Financing non-UK subsidiaries of a UK group

Since the reform of the CFC rules in 2013, many UK-owned multinational groups have relied on the finance company partial exemption (FCPE) from the UK CFC rules to finance their non-UK subsidiaries. This has the effect of imposing tax at a quarter of the corporation tax rate (currently imposing tax at 4.75 per cent) on profits earned by a CFC from providing funding to other non-UK members of the relevant group. In certain situations, the tax may be eliminated entirely. Prompted by a challenge from the EU under the state aid regime, from 1 January 2019, the UK amended the FCPE rules to exclude profits attributable to significant people functions within the UK. The European Commission's challenge of the pre-2019 FCPE regime is currently being appealed by the UK government and affected groups.

iii Tax groups

Although the UK does not permit group companies to be taxed on the basis of consolidated accounts, the various grouping rules achieve a degree of effective consolidation. A group consists, in most cases, of a parent company and its direct or indirect subsidiaries, but the test is different for different purposes.

Group relief group

Losses (other than capital losses – discussed below) may be surrendered from one UK-resident group company to another. Losses can also be surrendered by or to a UK PE of a non-UK group company. A UK PE of an overseas company can surrender those losses only if (broadly) they are not relievable (other than against dual inclusion profits) in the overseas country. Similarly, a UK company can surrender the losses of an overseas PE if those losses are not relievable (other than against dual inclusion profits) in the overseas country.

A group relief group requires 75 per cent common economic ownership.

Capital gains group

It is possible to reallocate gains (or losses) between capital gains group members. In addition, capital gains assets may be transferred between group members on a no gain, no loss basis, provided that the asset remains within the scope of UK corporation tax. This effectively postpones liability until the asset is transferred outside the UK group or until the company holding the asset is transferred outside the group. Where the transferee is a capital gains group member resident in an EEA state and no gain, no loss treatment is not available, the tax liability may be spread by entering into a payment plan with HM Revenue and Customs (HMRC).

When a company leaves a capital gains group holding an asset that it acquired intra-group in the previous six years, a degrouping charge may arise. This charge will deem the leaving company to have disposed of and immediately reacquired those assets, at market value, immediately after their acquisition. However, in some cases, the degrouping charge will be added to the consideration received for the sale of the shares in the transferee company and may then be exempt under the SSE (see above).

A capital gains group consists of a principal company and its 75 per cent subsidiaries and their 75 per cent subsidiaries (and so on), provided that the principal company has at least 51 per cent economic ownership of all the companies.

Stamp duties grouping rules

Transfers between group companies are relieved from stamp duties where certain conditions are met. A stamp duty group requires 75 per cent common economic ownership.

VAT group

VAT group membership is voluntary. Transactions between group members are usually disregarded for VAT purposes. As a result of Brexit, certain changes have been made to how this rule operates. It no longer applies, in particular, where goods move from Great Britain to Northern Ireland.

Broadly, two or more corporate bodies are eligible to be treated as members of a VAT group if each is established or has a fixed establishment in the UK and they are under common control. Since 1 November 2019, VAT grouping is also possible between individuals and partnerships who have a business establishment in the UK and any UK body corporate they control.

iv Intra-group transactions

Transfer pricing

The UK's transfer pricing rules apply to both international and domestic transactions between associated companies. Two companies will be associated if they satisfy the 'participation condition'. This stipulates that, at the time of the transaction, one of the parties directly or indirectly participates in the management, control or capital of the other (or another person so participates in both).

Usually, transfer pricing adjustments may be made only where they would increase UK-taxable profits. However, where transfer pricing adjustments are made to a UK–UK transaction, the 'other side' of the transaction may make a compensating adjustment to reduce its taxable profits correspondingly.

Diverted profits tax

In 2015, the UK introduced the diverted profits tax (DPT), which aims to protect the UK tax base from artificial profit shifting. It has two main targets: (1) where there is a substantial UK operation but sales to UK customers are made by a non-UK affiliate in such a way that the UK operation is not a PE of that non-UK affiliate; and (2) where the UK operation makes deductible payments (e.g., royalties for IP) to a non-UK affiliate and they are taxed at less than 80 per cent of the rate of UK corporation tax. As a deterrent, the DPT rate is 25 per cent, compared with the headline corporation tax rate of 19 per cent. The DPT rate will increase to 31 per cent from April 2023, reflecting the increase in the headline corporation tax rate. In practice, most DPT cases are resolved through transfer pricing adjustments, rather than through a DPT charge.

v Third-party transactions

Because of the SSE on the disposal of shares in trading companies, sellers of businesses typically prefer to sell shares in the target rather than selling assets.

Gains arising from the disposal of shares in a UK company by a non-UK resident are generally not subject to UK corporation tax, subject to certain anti-avoidance rules. In particular, since 2019, gains made by non-UK residents on the direct or indirect disposal of interests in UK real estate are subject to tax. Subject to limited exceptions, gains arising from disposals of shares in entities that derive at least 75 per cent of their value from UK land, where the person making the disposal holds a substantial indirect interest in the land (generally at least 25 per cent), are taxed.

Separately, special rules apply to disposals by non-residents of shares in companies that hold petroleum production licences for the UK North Sea.

It is possible, if certain conditions are met, to effect disposal of a trade on a tax-exempt basis by hiving the trade into a new company and then selling the shares in the new company. If structured correctly, the SSE is available even though the shares in the new company may not have been in existence for 12 months, and exit charges on the intra-group transfer of the trade may also be cancelled. Hive-downs of capital assets into a subsidiary followed by a sale of that subsidiary on a tax-exempt basis have been possible since 2011, and similar (if slightly less generous) rules have applied to IP hive-downs since 2018.

If the SSE is not available, a seller of shares may still be able to roll over or defer payment of any tax liability if the consideration for the sale comprises shares or loan notes issued by the purchaser.

Where a UK company disposes of business assets, tax on any chargeable gains arising from the sale of land, buildings, and fixed plant and machinery can be deferred by claiming business asset rollover relief, provided that the proceeds of the sale are reinvested in qualifying assets.

International considerations

The UK's historical membership of the EU, and therefore the application of the European 'freedoms', has meant that the UK now treats many cross-border transactions in the same way as wholly domestic transactions. For example:

  1. most tax grouping rules look to worldwide ownership to establish group membership, although transactions may be treated as intra-group only if both parties are within the charge to UK tax;
  2. dividend exemption applies to dividends received from UK and from non-UK companies; and
  3. SSE applies to shares in UK and non-UK companies.

Interest paid to another UK company is not subject to withholding tax, whereas a borrower paying interest to a non-UK company would need to rely on one of the other exemptions from withholding tax listed above, or claim relief under a tax treaty.

If a company moves its tax residence out of the UK, there is a deemed disposal of all of its assets. The company also must make arrangements with HMRC for the post-migration payment of taxes.

vi Stamp taxes

Stamp duty

Stamp duty is a tax on documents that transfer shares, certain securities or an interest in a partnership holding those shares or securities. It is usually borne by the purchaser. The main charge is levied at 0.5 per cent of the consideration (subject to a market value override in certain circumstances). In practice, stamp duty is generally payable only if the stock or securities are issued by a UK-incorporated company.

Stamp duty reserve tax

Stamp duty reserve tax (SDRT) is charged on an agreement to transfer chargeable securities for money or money's worth. Subject to some exceptions, 'chargeable securities' are stocks or shares issued by a company incorporated in the UK and units in a UK unit trust scheme. SDRT is imposed at the rate of 0.5 per cent of the consideration (as with stamp duty, subject to a market value override in certain circumstances). Although there is a significant overlap between stamp duty and SDRT, it is usually possible to prevent there being a double charge.

Depositary receipts and clearance

Because shares and securities in depositary receipt form or in a clearance system may be traded free of stamp taxes, the legislation imposes an entry charge at the rate of 1.5 per cent on issues or transfers to a depositary receipt issuer or into a clearance service. The decision in HSBC2 found that, in many instances, this charge is contrary to EU law, so the 1.5 per cent charge is rarely chargeable. Absent an express change in law, this remains the position following Brexit.

Stamp duty land tax

Stamp duty land tax (SDLT) is a tax on transactions involving land in England or Northern Ireland and is payable by the purchaser. The top rate of SDLT on commercial property is 5 per cent; for residential property, the rate can reach 15 per cent. Since April 2021, a 2 per cent surcharge is added to SDLT rates due on a residential property transaction by a non-resident purchaser. There is also an SDLT charge on the net present value of rent payable under a new lease. Similar tax rules apply in Scotland and in Wales.


The UK has had VAT since 1973, in line with EU law. There are three main rates of VAT:

  1. the standard rate is 20 per cent;
  2. the reduced rate is 5 per cent (e.g., for domestic fuel); and
  3. the zero rate covers, for example, books, children's clothes and most food.

Certain supplies, such as banking and insurance, are exempt from VAT. This means that businesses in those sectors are usually unable to recover much of the VAT that they incur on supplies made to them.

The UK's fundamental VAT rules remain in place following Brexit, which is not surprising given that VAT generates over 15 per cent of all UK tax receipts. The VAT consequences of transactions in goods and services between the EU and the UK have, however, altered. Any sales of goods from EU businesses to Great Britain are now generally imports and any sales of goods from Great Britain to EU customers have become exports. The rules relating to the supply of services from the UK to the EU are now the same as the rules relating to the supply of services from the UK to any customer outside the EU.

The Northern Ireland Protocol means that Northern Ireland maintains alignment with the EU VAT rules for goods, including on goods moving to, from and within Northern Ireland, and is treated as a member of the EU for these purposes, whereas it will be subject to the UK VAT rules on services. HMRC will continue to be responsible for the operation and collection of VAT in Northern Ireland.

International developments and local responses

i OECD-G20 BEPS initiative

The UK has enthusiastically applied the BEPS initiative, although it also pre-empted the BEPS project and introduced DPT in 2015. In relation to BEPS, the UK:

  1. was the first country to commit formally to implementing the country-by-country template;
  2. modified its patent box regime in response to Action 5 (countering harmful tax practices);
  3. introduced an anti-hybrids regime from 2017, which to some extent has a broader reach than the BEPS recommendations;
  4. enacted legislation to implement Action 4 (deductibility of interest); and
  5. ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (Multilateral Instrument) (MLI) and notified most of its treaties to the OECD.

The UK has also extended its royalty tax regime, from 2019, such that any company in a low- or no-tax jurisdiction is itself liable to pay UK income tax at 20 per cent on royalties, to the extent that they are attributable to (eventual) sales to UK customers. This charge applies even if the royalty income is subject to a CFC or global intangible low-taxed income charge, and is supported by secondary liability provisions, under which the UK tax can be collected from affiliates if the royalty recipient fails to pay.

The UK is an active participant in the ongoing international tax reform project led by the OECD Inclusive Framework on BEPS, which is often referred to as BEPS 2.0. Two developments should be highlighted. On 21 October 2021, the UK and certain other European countries agreed with the US on a transitional credit system for, and the withdrawal of, their digital services taxes on the entry into force of Amount A under Pillar One. Following the publication of the Global Anti-Base Erosion Rules under Pillar Two by the Inclusive Framework in December 2021, on 11 January 2022 the UK government published a consultation on the implementation of those rules in the UK.

ii EU proposals on taxation of the digital economy

The UK imposed a digital services tax from April 2020 at the rate of 2 per cent of UK revenue from certain search engines, social media platforms and online marketplaces. The UK regards the rules as an interim measure, having agreed to abolish them once reform of the international rules on profit allocation takes place, and has committed to not introduce any 'similar measure'. In February 2022, the Treasury consulted on the introduction of an 'online sales tax', in addition to VAT and digital services tax, with the stated aim of 'levelling the tax playing field' between online retailers and bricks and mortar retailers (as the latter group typically pay much higher property taxes). Obstacles to introducing an online sales tax include complexities in determining the scope of the tax, as well as ensuring that the tax would not fall within the definition (still to be agreed) of a similar measure to digital services tax.

iii Tax treaties

The UK has one of the most extensive treaty networks in the world, with over 130 comprehensive treaties in force. One of the consequences of Brexit (and the resulting loss of the Parent–Subsidiary and Interest and Royalties EU Directives) will be greater reliance on the UK's treaty network to provide exemption from EU withholding taxes. The practical applications of the typical limitation on benefit clauses present in many US treaties may also be affected. This is shown in the UK–US treaty, which requires a UK holding company's non-UK subsidiaries to be owned by an 'equivalent beneficiary' to obtain the benefits of US treaties. This is generally defined as a resident of a Member State of the European Community, of an EEA state or of a party to the North American Free Trade Agreement. Unfortunately, the US Treasury did not address this prior to Brexit, meaning that the UK no longer falls within the definition of equivalent beneficiary, and a UK company and its non-UK subsidiaries may be denied treaty benefits.

UK tax treaties generally follow the OECD Model Tax Convention on Income and on Capital, with some inevitable variation from one treaty to the next. In general, UK tax treaties tend to reduce or eliminate withholding taxes. In the past, the corporate residence tiebreak in UK treaties tended to be a place of effective management test, but newer treaties have adopted a mutual agreement tiebreak. The UK has also opted for this in the MLI.

iv DAC6

Since the end of the Brexit transition period, the UK has repealed DAC6 (the EU's mandatory disclosure requirements for cross-border arrangements) for the vast majority of cases. DAC6 now applies only in respect of arrangements that involve attempts to conceal income or assets or to obscure beneficial ownership. The UK has, however, had its own domestic mandatory disclosure rules since 2004.

Recent cases

The UK tax authorities take a robust approach where they perceive aggressive tax planning, and recently have a strong track record in the courts. Nonetheless, some taxpayers have enjoyed success too.

i Taxpayer losses

In the decision in GE Financial Investments,3 which is under appeal, the First-tier Tribunal (FTT) found that the appellant, a UK company whose shares had been stapled to a US company, was not entitled to claim a foreign tax credit against UK corporation tax for payments it made in respect of US federal income tax. The appellant had argued that it was entitled to relief from double taxation under the United Kingdom–United States Double Taxation Convention 2001 (the Convention).

The appellant argued that the share staple (which resulted in the appellant being liable to US federal income tax under US domestic law as it was regarded as a US corporation) brought it within the scope of Article 4 of the Convention test for US residency. This was on the basis that the staple fell within the meaning of 'any other criterion of a similar nature' to those such as domicile, residence and incorporation listed in Article 4(1). The FTT considered, however, that for there to be such a criterion, there must, in addition to the imposition of a worldwide liability to tax, also be a connection or attachment by the appellant to the US (which, the FTT found, was absent in this case).

The appellant's second argument was that, by virtue of its participation in a limited partnership that managed several large loans in the US, it fell within Article 7 of the Convention because it carried on business in the US through a PE. The FTT rejected this argument on the basis that the company's participation in the partnership was of too passive and sporadic a nature and, in particular, the company lacked participation in the strategic direction of the partnership.

Development Securities4 concerned a scheme to enhance capital losses through transactions undertaken by three Jersey companies. The scheme would fail if the companies were resident in the UK. The Court of Appeal overruled the Upper Tribunal's decision and reinstated the finding of the FTT that the Jersey companies in fact had their central management and control in the UK, and were therefore UK tax resident, on the basis that the directors simply followed the instructions of their UK parent company, did not engage with the substantive decision in question and approved transactions that made no commercial sense for the Jersey companies themselves. The appeal was, however, limited only to the question of whether the reasons given by the Upper Tribunal were valid. This case ultimately turned on its extreme facts and should be limited to similar scenarios. We do not expect it to impact on special purpose vehicles that are asked by their parent to enter into transactions that make commercial sense for them.

ii Taxpayer victories

The FTT decision in Euromoney,5 which the taxpayer won, concerned a statutory purpose test. The parent company's tax director proposed replacing cash consideration on the sale of shares (that would not qualify for the SSE) with preference share consideration that could be held for 12 months and then redeemed, benefiting from the SSE at that stage. Although there were commercial reasons for the appellant wanting to hold share consideration in the purchaser, the purchaser also wanted to receive some of the consideration in cash. HMRC challenged the 'rollover' of capital gains on the exchange of shares on the basis of an anti-avoidance rule disallowing such treatment to exchanges carried out as part of arrangements, one of the main purposes of which is tax avoidance. The FTT held that, although the avoidance of corporation tax had been one of the purposes, on the facts (which were of central importance, as to be expected in any decision on the application of a purpose test), it was not a main purpose of the overall deal. Accordingly, the restriction on rolling over the capital gain into the exchanged shares did not apply.

The FTT decision in Blackrock6 allowed deductions for interest incurred on US$4 billion worth of intra-group loan notes issued as part of an acquisition funding structure. HMRC sought to deny the deductions based on either the 'unallowable purpose' rule or transfer pricing. On the unallowable purpose argument, the FTT found that there was both a commercial and a tax purpose in issuing the loan notes but that the company would have issued the loan notes even if there had been no tax advantage, so all the relevant debits should be apportioned to the commercial purpose rather than the tax purpose, with the result that all the debits were deductible. The FTT also rejected HMRC's transfer pricing argument and emphasised that in this case the correct comparator was a hypothetical US$4 billion loan by an independent lender to the actual borrower, having regard to the covenants that such an independent lender would have required. The Upper Tribunal has now heard the Blackrock appeal and we are awaiting the judgment.

Outlook and conclusions

In the short term, the UK's new position outside the EU, the ongoing desire to remain open for business post-Brexit and the continuing effects of covid-19 on the public finances are likely to be the main drivers for changes to the UK tax regime. Although the UK is now able to deviate from EU rules (subject to its international commitments and commitments made in the Trade and Cooperation Agreement with the EU), any changes implemented will need to take account of the current economic climate and continue to protect the UK tax base.


1 Emma Game is a senior tax counsel, Sarah Osprey is a senior tax associate and Dominic Robertson is a tax partner at Slaughter and May. Many thanks are also due to Susannah Hill for her research assistance in preparing this chapter.

2 HSBC Holdings PLC and Vidacos Nominee Ltd v. HMRC (C-569/07); HSBC Holdings PLC and the Bank of New York Mellon Corporation v. HMRC [2012] UKFTT 163 (TC).

3 GE Financial Investments v. HMRC [2021] UKFTT 0210 (TC).

4 HMRC v. Development Securities Plc and Others [2020] EWCA Civ 1705.

5 Euromoney Institutional Investor PLC v. HMRC [2021] UKFTT 0061 (TC).

6 Blackrock Holdco 5 LLC v. HMRC [2020] UKFTT 0443 (TC).

The Law Reviews content