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BlackRock – Loans and ALP - Decision of the UK Upper Tribunal in Case No [2022] UKUT 00199

dated 19 July 2022


In 2009, BlackRock Group purchased Barclays Global Investors for $13.5 billion, partly paid in shares ($6.9bn) and cash ($6.6bn). The cash portion was provided by BlackRock Holdco 5 LLC (“LLC5”), a UK tax-resident US Delaware Company, funded by its parent company (“LLC4”) via $4bn loan notes. Subsequently, LLC5 claimed UK tax deductions on interest payments on these internal loans.


The UK tax authorities rejected these deductions after an audit, asserting that such a transaction wouldn't have transpired between independent parties and accusing the loans of being a method for unacceptable tax evasion. BlackRock Group contested this ruling before the First Tier Tribunal (FTT). The FTT decided that a fair, independent lender would have given similar loans to LLC5. Regarding the "Unallowable Purpose" issue, the FTT ruled that the loans had both a commercial and tax advantage purpose. Yet, it justified allocating all debits to the commercial purpose, thereby making them entirely deductible by LLC5.


However, on the tax authorities’ appeal, the Upper Tribunal concluded that the First Tier Tribunal had made a legal mistake, hence it upheld the tax authorities' appeal on both the transfer pricing and unallowable purpose issues. As a result, the First Tier Tribunal's decision was annulled, and the tax authorities' adjustments to LLC5's tax returns were validated. On the issue of transfer pricing, the Court held that the provision of loans from LLC4 to LLC5 did not follow the arm's length principle, as the loans would not have been made between independent enterprises, conferring a potential advantage regarding UK taxation. Consequently, the profits and losses of LLC5 are to be calculated as though the arm's length provision had been made, and since no arm's length loan for $4 billion would have occurred in the way LLC4 made to LLC5, HMRC's changes to the relevant tax returns were confirmed.


On the ‘unallowable purpose’ issue, the Court held that the FTT was correct in finding that LLC5 had both a commercial purpose and an unallowable tax advantage main purpose for the loans. However, it also held that the FTT erred in deciding that the just and reasonable apportionment was only to the commercial purpose; instead, the facts led to the conclusion that the loan relationship debits should be wholly attributed to the unallowable tax purpose and thus disallowed.

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