The recent case of Oxford Instruments indicates that HMRC may increasingly be looking to challenge old "tower" funding arrangements - a form of financing which can involve an arbitrage between the way loans are taxed in the US and UK. "Tower" arrangements are ineffective under current UK tax rules, but were fairly common at the time this case relates to.
Funding group operations in this way was often said not to involve a UK tax advantage, and in this case the taxpayer had obtained an advance clearance from HMRC under the anti-arbitrage rules (no longer in force).
HMRC's challenge focused on the loan made by a US group entity to its UK subsidiary satisfied by the issuance of preference shares. HMRC argued that the loan had an "unallowable purpose" in that it secured a tax advantage through the creation of interest deductions. The Tribunal agreed with HMRC that this tax advantage was one of the borrower's main purposes.
The UK tax advantage identified by the Tribunal was the interest deduction created by the US-UK loan. This could not be "netted-off" with the taxable income received under a separate UK-US loan in the same group. The Tribunal commented that even on a straightforward borrowing between two UK companies where interest deductions are matched by taxable interest income, a UK tax advantage could arise for the borrower under the "unallowable purpose" rule.
This arguably goes further than HMRC's guidance, which states that the "unallowable purpose" rule will not normally apply to interest deductions in one UK group company matched by equal and opposite interest income in another UK group company for the same loan, provided that the funding is not then utilised to secure a tax advantage.
Groups which have used "tower" financing arrangements in the past may therefore consider it prudent to take stock of contemporaneous advice and other evidence to distinguish their circumstances from those present in this case.