A victory for the taxpayer and common sense!

There has been a lot of discussion and consultation recently about the possible introduction of a General Anti-Avoidance Rule ('GAAR') in the UK, but of course several parts of the tax code already contain their own anti-avoidance provisions.

In particular, the legislation governing loan relationships (s442(4) CTA 2009), capital allowances (e.g. ss132, 416E CAA 2001) and intangible assets (s864 CTA 2009). The judicial approach to these provisions, most recently seen in Lloyds TSB Equipment Leasing (No. 1) Limited v HMRC [2012] UKFTT 47 (TC), provides further helpful guidance as to how such provisions should be interpreted.

Tax can be a significant (sometimes the most significant) cost in a commercial transaction. It would be a dereliction of duty therefore for businesses not to take account of the fiscal consequences when planning any major transaction.

Although the precise wording varies depending upon which part of the tax code is under consideration, anti-avoidance provisions generally require HMRC to disregard arrangements where the main object, or one of the main objects, is to obtain a tax advantage.

It will in each case be a question of fact for the Tribunal to determine, having heard the evidence, just how important tax was to those implementing the transactions under consideration, but as a question of legal interpretation, how important does tax need to be before the arrangements can be disregarded?

It has been said that in order for a tax advantage not to be a 'main object', it has to be:

• 'the icing on the cake' (Lightman J in IRC v Sema Group Pension Scheme [2002] EWHC 94 (Ch) at para 53);
• 'purely incidental and of little importance compared with the other object or objects' (Special Commissioner Barlow in Snell v HMRC [2008] STC (SCD) 1094).

Clearly, if tax is purely incidental, or just the icing on the cake, then it cannot have been the main object, but it does not necessarily follow that if tax was important, then it must have been the main object.

The Oxford dictionary defines 'main' as: 'principal, most important, greatest in size or extent'.  Tax may be a very important consideration and more than purely incidental, but still not be the most important factor or even one of the most important factors. This is particularly true where a taxpayer has a choice as to how to structure a transaction.

In Commissioners of Inland Revenue v Brebner [1967] 2 AC 18, Lord Upjohn, at page 30, confirmed that where a taxpayer carrying out a commercial transaction has a choice in deciding how to structure his transaction, it should not necessarily be inferred that if he chooses the structure that is the more tax efficient then one of his main objects is to avoid tax: 'No commercial man in his senses is going to carry out a commercial transaction except upon the footing of paying the smallest amount of tax that he can.'

The First-tier Tribunal adopted a similar approach to Lord Upjohn in the Lloyds TSB Equipment Leasing case.

HMRC challenged the taxpayer's overseas leasing transactions on a number of grounds, including that a purpose-based anti-avoidance rule (section 123(4) CAA 2001) prevented the taxpayer from relying on the qualifying purpose rule in s123(1) CAA 2001 (ships let on charter in the course of trade in the UK). The Tribunal found for the taxpayer on all grounds. The judgment is lengthy, but the following passages are worthy of note:

'It is questionable whether it does in any event assist the Commissioners' case to say, in effect, 'They could have done it differently', having regard to Lord Upjohn's comment in the Brebner case.' (Para 409); and:

'The capital allowances were a route to reduced cost of funds for the financing of transactions already decided upon. The parties knew this to be the case if the capital allowances proved to be available, and they wanted to obtain the benefit of such allowances, by ensuring that, in carrying out their commercial objectives, they would comply with the necessary conditions upon which the capital allowances were dependant. In terms of priority or hierarchy, that was subservient to, or of a lesser importance than, achieving the commercial purposes of the relevant transactions.' (Para 427).

The Lloyds TSB decision is a victory for common sense.  HMRC should appreciate that taxpayers are not obliged to structure their affairs so as to pay the maximum amount of tax possible. Taking account of the fiscal consequences when entering into commercial transactions is not synonymous with 'unacceptable' tax avoidance!