The facts
In December 2009, the BlackRock group acquired the North American investment management business of Barclays Global Investors (BGI). The acquisition structure included BlackRock Holdco 5 LLC (LLC5), a Delaware-incorporated but UK tax resident entity, which received a US$4 billion intra-group loan from its parent, BlackRock Holdco 4 LLC (LLC4). LLC5 used the proceeds to subscribe for preference shares in BlackRock Holdco 6 LLC (LLC6), which then completed the acquisition of BGI.
Over approximately six years, LLC5 claimed UK corporation tax deductions for the interest paid on those loans — losses it sought to surrender to other UK group members, reducing the group’s overall UK tax liability.
HMRC challenged the interest deductions on two grounds: first, that the loans were not on arm’s length terms and should be adjusted under the UK transfer pricing rules in Part 4 of the Taxation (International and Other Provisions) Act 2010 (TIOPA); and second, that securing a UK tax advantage was the main purpose of the arrangement, triggering the loan relationships unallowable purpose rule under sections 441–442 of the Corporation Tax Act 2009 (CTA 2009).
The litigation
First-tier Tribunal (FTT) · 2020 · taxpayer succeeds on both grounds
The FTT found in LLC5’s favour on both the transfer pricing and unallowable purpose questions. On transfer pricing, it accepted that an independent lender would have made the loans at similar interest rates, albeit subject to additional covenants — negative pledges, change of control provisions, restrictions on further borrowing — that were not present in the actual transaction. Critically, the FTT was prepared to read in those hypothetical third-party covenants when assessing arm’s length comparability. With the covenants assumed in place, the interest rates were defensible. On the unallowable purpose point, the FTT accepted that LLC5 had both a commercial and a tax purpose, but held that none of the interest deductions should be attributed to the tax purpose on a just and reasonable apportionment.
Upper Tribunal (UT) · 2022 · HMRC succeeds on transfer pricing
HMRC appealed and succeeded at the UT on the transfer pricing point. The UT held that third-party covenants not present in the actual transaction could not be imported into the arm’s length comparator. The transfer pricing analysis must focus on the actual terms of the loan as made — not a hypothetical restructured version of it. Since an independent lender would not have advanced US$4 billion to LLC5 without those covenants, and those covenants were absent, the arm’s length test was failed. The UT also overturned the FTT’s finding on unallowable purpose, concluding that securing a tax advantage was the main purpose of LLC5’s participation in the loan arrangement.
Court of Appeal (CoA) · 2024 · taxpayer succeeds on transfer pricing, loses overall
The CoA reversed the UT on the transfer pricing question, restoring the FTT’s original finding. The CoA held that the UT had drawn the analysis too narrowly: it was permissible to consider whether a hypothetical arm’s length lender could have been found for a transaction with comparable economic substance, even if the precise covenant structure of that hypothetical transaction differed from the actual loan terms. On the facts, the CoA accepted that an arm’s length lender could have been found, at comparable rates, for a transaction of this nature.
However, the CoA agreed with the UT on the unallowable purpose point. LLC5’s commercial rationale was, on analysis, subordinate to its tax purpose. But for the tax deduction, the structure — and LLC5’s role within it — would not have existed. The interest deductions were therefore disallowed in full under CTA 2009, with 100 per cent of the debits attributed to the impermissible tax purpose.
ajiho commentary
The transfer pricing question was genuinely contested — and the answer changed three times
The FTT, UT and CoA each reached a different conclusion on the same fundamental issue: when comparing an intra-group loan to an arm’s length benchmark, can you hypothesise terms — covenants, security, structural protections — that were not present in the actual transaction? The UT said no. The CoA said yes, within limits. This is not an academic distinction. For any group with intra-group debt that lacks the full suite of terms an external lender would require, this question is live.
The transfer pricing and unallowable purpose analyses operate independently
The fact that the CoA found the loan pricing defensible on transfer pricing grounds did not save the deductions. The unallowable purpose rule is a separate and parallel line of attack. Groups that have invested in robust arm’s length pricing analysis should not assume that this is sufficient protection where the commercial rationale for the structure itself is thin. HMRC has demonstrated consistently — across this case and others including JTI Acquisition Company (2011) Ltd v HMRC — that it will pursue both grounds simultaneously.
The CoA’s approach to apportionment is notable
Having found that LLC5 had both a commercial purpose and a tax purpose, the CoA attributed 100 per cent of the debits to the tax purpose on the basis that the commercial purpose was, in substance, a by-product of the tax objective. The judgment makes clear that awareness of tax deductibility is not, by itself, enough to fail the test. But where the evidence shows that the entity or structure would not have existed absent the tax benefit, the outcome is likely to be the same.
What this means for your business
If your group has intra-group debt — acquisition financing, treasury lending, cash pool positions — this case raises several practical questions worth addressing now rather than at enquiry stage.
On the transfer pricing analysis: is your arm’s length benchmark based on the actual terms of the loan as documented, or on a hypothetical transaction that reads in protections not present in your agreements? The CoA’s ruling offers some latitude here, but the UT’s stricter approach shaped litigation for two years and may inform how HMRC approaches enquiries. The safest position is to ensure that the actual loan documentation reflects, as closely as practicable, the terms an arm’s length lender would require — including relevant covenants, maturity, and security provisions.
On unallowable purpose: where a UK group entity exists primarily to hold intra-group debt and generate interest deductions, the commercial rationale for that entity needs to be clearly documented and genuinely substantive. The CoA’s 100 per cent attribution to tax purpose in this case was driven by specific facts, but it illustrates how readily the scales can tip once an enquiry has started.
On governance: contemporaneous documentation — board minutes, treasury memos, credit committee papers — that demonstrates the commercial decision-making behind intra-group financing decisions remains the most practical line of defence. The FTT’s original findings in BlackRock’s favour rested substantially on contemporaneous evidence and credible witness testimony. That material mattered.
Case references
BlackRock Holdco 5 LLC v HMRC [2020] UKFTT 443 (TC) — First-tier Tribunal
HMRC v BlackRock Holdco 5 LLC [2022] UKUT 00199 (TCC) — Upper Tribunal
BlackRock Holdco 5 LLC v HMRC [2024] EWCA Civ 330 — Court of Appeal
Judgments in English. Available on BAILII, GOV.UK, and the Judiciary of England and Wales website.