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Blackfriars Hotel (UK) Holdings Ltd v HMRC

This is a case about the use of losses carried forward. In this particular instance, the losses took the form of non-trading loan relationship deficits.

The company involved had incurred significant interest expense in previous years. This had led to a loss to carry forward but there was no realistic prospect of the company earning income from third-party transactions against which to set those losses.

Intra-group borrowings were thus put in place under which the company received interest income. It sought to set the brought-forward losses against this income so that the group as a whole obtained a tax benefit.

There is an anti-avoidance rule which prevents the use of carried-forward losses where the profits against which they are set arise from tax arrangements. Adopting a purposive construction of the legislation the tribunal had little difficulty in agreeing with HMRC that the creation of intra-group interest income in this way was a tax arrangement.

The more interesting question concerns the mechanics of the restriction.