UK vs Blackrock, November 2020, First-tier Tribunal, Case No TC07920

Posted on | By Courts of the UK | 2 Comments
Category: Commercially Irrational Transactions, Financial Transactions, General Anti-Avoidance Rules (GAAR), Tax Avoidance Schemes | Tag: , , , , , , , ,
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In 2009 the BlackRock Group acquired Barclays Global Investors for a total sum of $13,5bn . The price was paid in part by shares ($6.9bn) and in part by cash ($6.6bn). The cash payment was paid by BlackRock Holdco 5 LLC – a US Delaware Company tax resident in the UK – but funded by the parent company by issuing $4bn loan notes to the LLC.

In the years following the acquisition Blackrock Holdco 5 LLC claimed tax deductions in the UK for interest payments on the intra-group loans.

Following an audit in the UK the tax authorities disallowed the interest deductions. The tax authorities held that the transaction would not have happened between independent parties. They also found that the loans were entered into for an unallowable tax avoidance purpose.

A UK taxpayer can be denied a deduction for interest where a loan has an unallowable purpose i.e, where a tax advantage is the company’s main purpose for entering into the loan relationship (section 441 of the Corporation Tax Act 2009). If there is such an unallowable purpose, the company may not bring into account for that period ….so much of any debit in respect of that relationship as is attributable to the unallowable purpose.

The Court ruled in favor of BlackRock and allowed tax deduction for the full interest payments.

According to the Court it was clear that the transaction would not have taken place in an arm’s length transaction between independent parties. However there was evidence to establish that there could have been a similar transaction in which an independent lender. Hence, the court concluded that BlackRock Holdco 5 LLC could have borrowed $4bn from an independent lender at similar terms and conditions.

In regards to the issue of “unallowable purposes” the court found that securing a tax advantage was a consequence of the loan. However,  Blackrock LLC 5 also entered into the transactions with the commercial purpose of acquiring Barclays Global Investors. The Court considered that both reasons were “main purposes” and apportioned all of the debits (interest payments) to the commercial purpose.

 

Related Guidelines

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TPG2022 Chapter X paragraph 10.74For these reasons, the reliability of credit rating results derived from the use of publicly available financial tools may be improved to the extent the analysis can reproducibly demonstrate consistency of ratings using such tools with those provided by independent credit rating agencies....
TPG2022 Chapter X paragraph 10.73The credit rating methodology used in publicly available financial tools may differ significantly in certain respects from the credit rating methodologies applied by independent credit rating agencies to determine official credit ratings and the impact of any such differences should be carefully considered. For instance, publicly available tools generally use...
TPG2022 Chapter X paragraph 10.72Publicly available financial tools are designed to calculate credit ratings. Broadly, these tools depend on approaches such as calculating the probability of default and of the likely loss should default occur to arrive at an implied rating for the borrowing. This can then be compared to a market database in...

Supplemental Guidance

French Guidance on Intra Group LoansFrench guidance on application of the arm’s length principle to intra-group loans and interest deductions.   Click here for unofficial English translation  ...

2 comments on UK vs Blackrock, November 2020, First-tier Tribunal, Case No TC07920

  1. While HRMC was not successful in disallowing the intercompany interest deductions, it does appear that the taxpayer lowered the intercompany interest rates. I’m working on a short paper with a possible interpretation of the pricing issues. Hopefully it will be published next week.

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