A bit on Boots, but mainly on interest deductions in general….

I’ve been reading a bit about the claims against Boots using interest deductions to “shift profits”. War on Want say that this has occurred because Boots “has been able to deduct its finance costs from taxable income in its most profitable market.”

I didn’t get past that point in all honesty because I suddenly felt the need to point out something quite obvious.

If you’re going to suggest what Boots might have paid without the interest deduction, you also need to ask yourself how Boots would have performed without the investment into it.

If Boots has been able to legitimately take a deduction for its finance costs, three things follow:

  1. the interest is being charged at an arms length rate
  2. the interest is allowable under debt cap rules
  3. the loan is being used in the UK business

I wanted to focus on the last point simply because it is one of the most fundamental rules on calculating taxable profits.

If the loan were being used only to shift profits, the interest wouldn’t be an allowable deduction for tax purposes. It wouldn’t meet the criteria of CTA 2009, s 54, as per HMRC’s guidance on interest deductions.

The cash provided by the loan is therefore being used. It is being used to pay for all the things that are a part of the trade: paying employees, buying and manufacturing stock, paying overheads, purchasing assets for use in the trade, etc. All those sort of things that are generally considered to be beneficial aspects of business occurring in the UK.

Now, personally, I’d rather have that investment than not have the interest deduction in calculating taxable profits. That interest deduction comes because the capital is being put to use in the UK, in a way that is hopefully beneficial to all.

It seems a fair quid pro quo in principle.

From a quick glance at the Boots story I know there is a bit more to it than interest deductions, which is why this is a more general point here:

Allowable interest deductions do not tax avoidance make.

About Ben Saunders

I'm a Chartered Tax Adviser and a freelance writer. This is my personal blog about, well, mainly taxation. I might put other stuff in. Who knows.
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6 Responses to A bit on Boots, but mainly on interest deductions in general….

  1. I’m not sure that you’re right here- s54 is only looking at calculting trading profits, but there’s more to life than trade. It could just as easily be that the loan interest is a non-trading LR debit in a holding company which was used as the acquisition vehicle for the LBO. The NTLR debit could then be surrendered to the trading business as group relief, sheltering the trading profits.

    If the cash was used to buy the shares then the business could have been entirely unaffected by the existence or otherwise of the loan.

  2. I think Andrew is right, Ben. Relief for a non-trading deficit on a loan relationship would be available under CTA 2009 ss 456-463, subject to transfer pricing rules, worldwide debt cap, the “unallowable purpose” rule etc. I don’t think s 54 is relevant – relief for interest is available under CTA 2009 Part 5 (and is given in calculating trade profits if it is a trading loan relationship) or not at all. Please do tell if I’m missing something!

  3. Pingback: FCAblog » War on Want’s Alliance Boots analysis found wanting

  4. miketruman says:

    On the other hand, the great Bookkeeper of Life, Christie Malry, has an interesting analysis of why War on Want must be wrong – http://www.fcablog.org.uk/2013/11/war-on-wants-alliance-boots-analysis-found-wanting/

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