Glyn Fullelove, tax writer at Croner-i, considers the importance of the unallowable purpose test for loan relationships in the light of updated HMRC guidance and recent cases
1. The rule
The unallowable purpose rule is a key anti-avoidance provision within the loan relationship regime. The rule is found in CTA 2009, s. 441, and it disallows any debits arising in respect of a loan relationship where the loan relationship has an unallowable purpose (CTA 2009, s. 441(3)). The meaning of unallowable purpose is found in CTA 2009, s. 442(1), and is:
‘a purpose (the unallowable purpose) which is not among the business or other commercial purposes of the company.’
CTA 2009, s. 442 also makes it clear that where tax avoidance is the main purpose, or one of the main purposes for entering into the loan relationship, that avoidance is to be regarded as not among the business or other commercial purposes of the company and is thus an unallowable purpose.
