Upper Tribunal considers disallowance of imported losses

In UK Care No 1 Ltd v HMRC [2026] UKUT 00090 (TCC), the Upper Tribunal (UT) allowed, in part, the taxpayer's appeal against HMRC's closure notice that disallowed an accounting loss of over £150m arising from a loan relationship.

Background

UK Care No 1 Ltd (UKC1) is a Guernsey registered company which acted as the issuer of certain loan notes secured by the UK care home business of the group headed by the British United Providence Association Ltd (the BUPA Group). 

In 2016, UKC1 was not part of the BUPA Group, which wanted to sell a number of the care homes which formed part of the security package for the loan notes. UKC1 was therefore acquired by the BUPA Group, became UK resident and then redeemed the loan notes. The redemption gave rise to an accounting loss of just over £150m, being the difference between the amount UKC1 had to pay to redeem the loan notes and the carrying value of its liability under the loan notes in its accounts.

UKC1 brought into account a loan relationship debit in respect of this loss in its corporation tax return for the period ending 31 December 2016. The loss of £150,749,046, claimed by UKC1 at the date of redemption, was made up of three elements:

1. unamortised discount and unamortised issue costs of £4,130,198;
2. a compensatory element of £89,773,643; and
3. a penalty element of £56,845,205. 

HMRC opened an enquiry into UKC1's corporation tax return and in its closure notice it disallowed the whole of the debit and the accrued interest. 

HMRC argued that section 327, Corporation Tax Act 2009 (CTA), applied to disallow the debit on the basis that a loss arising in connection with a loan relationship could not be brought into account if it is wholly or partly referable to a time when UKC1 would not have been subject to UK taxation. UKC1 argued that section 327 did not apply to disallow any part of the debit claimed for two reasons:

1. the loss was entirely made up of expenses, therefore falling within sections 306A, CTA, and section 327, CTA, only applies to losses, not to expenses; and
2. no part of the loss was referable to a time when UKC1, and therefore its loan relationship, was not subject to UK taxation. 

During the First-tier Tribunal (FTT) proceedings, HMRC changed its position and contended that £93,903,841 of the debit should be disallowed. HMRC agreed that the penalty element was allowable and accepted that relief for all the accrued interest should be allowed.

FTT decision 

The appeal was dismissed in relation to £93,903,841 of the debit, comprising the unamortised discount, unamortised issue costs and compensatory element, and the FTT held it could not be brought into account. 

The FTT also held that the part of the loss, which did not relate to the penalty, was referable to a time prior to UKC1's migration to the UK and even if the redemption payment made by UKC1 was an expense, it was still a loss arising in connection with a loan relationship and the loss was restricted by section 327, CTA. 

UKC1 appealed to the UT.

UT decision 

The appeal was allowed in relation to the unamortised issue costs and the unamortised discount in the amount of £4,130,198. However, the UT dismissed the appeal in relation to the compensatory element of £89,773,643. 

With regard to the unamortised issue costs and discount, the UT ruled that the FTT's decision be set aside and remade on the basis that, as a matter of commercial reality, the part of the loss attributable to the unamortised issue costs was referable to the post-migration period (i.e. when UKC1 would have been subject to UK taxation) and therefore section 327, CTA, did not apply to disallow this portion. 

In relation to the compensatory element, UKC1's argument that the FTT erred by applying a 'but for' test of causation to determine the cause of the loss and the timing of that cause, was rejected by the UT. In the view of the UT, the FTT applied the right test having in mind the nature and operation of the contractual clause pursuant to which the redemption payment was made, the way in which loan notes are valued in the market, the fair value of the loan notes at the time of issue and in the pre-migration period, changes in market conditions and how the payment was calculated, including by reference to future interest payments if the loan notes had not been redeemed. It was perfectly legitimate to consider questions of causation including 'but for' causation as part of that analysis.

The FTT was therefore entitled to reach the conclusion that it did and the UT stated it would reach the same conclusion for the same reasons, namely, that the compensatory element of the loss was referable to the pre-migration period (i.e. when UKC1 would not have been subject to UK taxation and therefore section 327, CTA, would apply to disallow this portion). In particular, the UT held that the fact that the compensatory element was calculated by reference to future interest payments for which relief would have been available if the loan notes had run to term, does not mean that the loss is referable to the post-migration period. 

Comment

This decision provides helpful guidance on the application of the 'imported loss' restriction in section 327, CTA, and confirms that the concept of 'loss' in section 327 has a broad meaning, which can include expenses within section 306A, CTA. 

The decision also confirms that different elements of loan notes may be treated differently, requiring a careful analysis of the contractual terms and surrounding facts of the loan notes. 

The decision can be viewed here.