BlackRock Holdco 5 LLC v The Commissioners for Her Majesty’s Revenue and Customs

Case Overview

In BlackRock Holdco 5 LLC v HMRC the First-tier Tribunal (Tax Chamber) allowed the taxpayer’s appeal against HMRC closure notices that denied UK deductions for interest and related finance costs on $4bn of intra-group loan notes. The loan notes funded LLC5’s investment (via preference shares) in an acquisition vehicle that bought the North American investment management business of Barclays Global Investors (BGI US). The dispute turned on (i) UK transfer pricing under TIOPA 2010 Part 4 and (ii) the “unallowable purpose” rule for loan relationships (CTA 2009 ss441–442). (FTT at [1]–[3])

Key Facts

• LLC5 (a Delaware LLC) was UK tax-resident and within the BlackRock group. (FTT at [4(1)]–[4(3)])
• As part of the December 2009 acquisition, LLC5 issued $4bn of loan notes to its parent, LLC4, and used the funding to subscribe for preference shares in LLC6 (which acquired BGI US). (FTT at [1], [4(5)]–[4(7)])
• LLC5 claimed non-trading loan relationship debits for the finance expenses; the total debits claimed across the relevant periods were £654,109,576. (FTT at [4(24)]–[4(29)])
• HMRC issued closure notices (22 Nov 2016 for periods up to 31 Dec 2014; 16 Aug 2017 for 31 Dec 2015) amending returns to deny all the debits and the related group relief position. (FTT at [4(31)]–[4(34)])

Issues

1. Transfer pricing (TIOPA 2010 Part 4): did the $4bn intra-group lending differ from what would have been agreed between independent enterprises, including whether the loan would have been made at all? (FTT at [2(3)], [56]–[60])
2. Unallowable purpose (CTA 2009 ss441–442): was securing a tax advantage a “main purpose” of LLC5 being party to the loan relationships; and if so, what debits should be disallowed on a “just and reasonable” apportionment? (FTT at [2(1)]–[2(2)])

Decision (FTT)

1) Transfer pricing

The FTT accepted that an independent lender would not have made the loans on identical terms, but found that an arm’s length lender would have lent $4bn at similar rates provided additional protections/covenants were put in place to address the risks created by the preference-share/dividend-flow structure. On that basis, the tribunal did not accept HMRC’s “no loan at all” outcome. (FTT at [89]–[90], [101]–[103])

2) Unallowable purpose

The FTT found that LLC5’s purposes included both:

• a tax advantage purpose (interest deductions and surrender of deficits by group relief), and
• a commercial purpose (entering into the investment/financing as part of its business of making and managing passive investments).

However, on a “just and reasonable” apportionment, the FTT attributed none of the debits to the tax advantage purpose (so the debits remained deductible). (FTT at [120]–[123])

Outcome

The appeal was allowed in full and the closure notice amendments were set aside. (FTT at [124])

Practical Takeaways

• In complex acquisition financing, debt capacity is not just ratios: structural subordination and control over cashflows can drive the arm’s length analysis.
• Where independent-party protections (covenants) would be expected, be ready to evidence what the group structure, governance, and contractual rights do (or do not) do as functional equivalents.
• For CTA 2009 s441, purpose evidence matters (board papers, minutes, contemporaneous documentation), but the case also shows that apportionment can be as important as identifying purposes.

Procedural History

This brief covers the FTT (2020) decision. The case was appealed:

• The Upper Tribunal (2022) allowed HMRC’s appeal and denied deductions on both transfer pricing and unallowable purpose grounds. (UT at [99]–[100])
• The Court of Appeal (2024) allowed the taxpayer’s appeal on the transfer pricing point (rejecting the UT’s “two-party rule” reasoning) but ultimately upheld HMRC’s position under the unallowable purpose rules, so the interest deductions were denied on that alternative basis. (EWCA Civ 330)

Related Content

For practical guidance on evidencing arm’s length outcomes, see our glossary entry on the Arm's Length Principle. Although this case concerns financing rather than service fees, the documentation discipline is similar to Documentation for Services.

Frequently Asked Questions

Q1. What was the transfer pricing question in BlackRock Holdco 5 (FTT)?
Whether, absent the group relationship, an independent lender would have made the same $4bn lending to LLC5 (and if so, on what terms) under TIOPA 2010 Part 4. (FTT at [89]–[90], [101]–[103])

Q2. Why were covenants central to the FTT’s arm’s length analysis?
Because LLC5’s ability to service the debt depended on dividend flows through a controlled structure; the experts’ evidence was that an independent lender would need protections to manage that risk. (FTT at [90], [96])

Q3. What is CTA 2009 s441 (“unallowable purpose”) and how did it apply at the FTT?
Section 441 can disallow loan relationship debits to the extent attributable (on a just and reasonable apportionment) to a non-commercial main purpose—typically securing a tax advantage. The FTT found a tax advantage purpose existed but disallowed none of the debits on apportionment. (FTT at [120]–[123])

Q4. Did the FTT accept HMRC’s argument that no third-party lender would lend at all?
No. The FTT rejected a “no-loan” arm’s length outcome, finding instead that a $4bn loan could be made if appropriate covenants were in place. (FTT at [101]–[103])

Q5. Is the FTT decision the final word?
No. The decision was appealed to the Upper Tribunal and then the Court of Appeal, which reached different conclusions (particularly on the unallowable purpose issue). See the linked judgments in Sources.