Euromoney – Tribunal considers 'main purpose' test
In Euromoney Institutional Investor PLC v HMRC [2021] UKFTT 0061 (TC), the First-tier Tribunal (FTT) upheld the appellant's appeal, finding that the avoidance of liability to tax was a purpose, but not the main purpose, or one of the main purposes, of the relevant arrangements, for the purposes of section 137(1), Taxation of Chargeable Gains Act 1992 (TCGA).
Background
Euromoney Institutional Investor PLC (Euromoney) was a UK registered and tax resident company. It appealed to the FTT against an amendment made by HMRC to its corporation tax (CT) return, which increased the amount of CT payable for the accounting period ended 30 September 2015, by £10,483,731.87.
Euromoney sold its shares in Capital Data Ltd (CDL) to Diamond Topco Ltd (DTL). The consideration consisted of the issue of ordinary shares and redeemable preference shares in DTL. The original intention had been that the consideration would be a combination of ordinary shares and cash, but Euromoney had suggested the substitution of the preference shares. When the preference shares were redeemed after one year no tax would arise as the disposal would qualify for the substantial shareholding exemption (SSE) by virtue of the holding of ordinary shares. The intention was that the entire transaction should be treated as a share for share exchange under section 135, TCGA, with no immediate tax charge.
Where section 135 applies, an exchange of shares is treated as resulting in neither a gain nor a loss. However, section 135 will not apply, by virtue of section 137(1), TCGA, unless the exchange is effected for bona fide commercial reasons and does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is the avoidance of capital gains tax or CT.
HMRC issued a closure notice denying relief under section 135 on the basis that the exchange formed part of a scheme or arrangements of which the main purpose, or one of the main purposes, was the avoidance of liability to CT on chargeable gains, with the result that section 135 was disapplied by section 137(1).
There was no dispute that the exchange of shares was effected for bona fide commercial reasons. The issue between the parties was whether the restriction in section 137(1) applied because the main purpose, or one of the main purposes, of the arrangements entered into by Euromoney was the avoidance of a liability to tax.
FTT decision
The appeal was allowed.
The FTT adopted the approach taken by the High Court in Snell v HMRC [2007] STC 1279 and considered the following issues of fact:
(1) was the exchange part of a scheme or arrangements and if so, what were they?
(2) did the purposes of such scheme or arrangements include the purpose of avoiding a liability to capital gains tax and if so, was it a main purpose?
Was the exchange part of a scheme or arrangements and if so, what were they?
The parties disagreed on what constituted the relevant arrangements. HMRC submitted that the arrangements were those in relation to the preference shares only, namely, the arrangements under which the cash consideration payable for the CDL shares was replaced with the preference shares in DTL, with the intention of holding the preference shares until such time as they could be disposed of subject to SSE, so that no tax charge would arise on that disposal. Euromoney argued that such a description of the arrangements was too narrow, as it failed to have regard to the arrangements as a whole.
The FTT agreed with Euromoney. Applying the decision of the House of Lords in IRC v Brebner [1967] 2 AC 18, the FTT considered that in order to reflect the reality of the position and in accordance with the wording of the statute, the arrangements must be taken as a whole and should not be limited to the arrangements that concerned only the acquisition of the preference shares.
Did the purposes of such scheme or arrangements include the purpose of avoiding a liability to capital gains tax and if so, was it a main purpose?
The FTT concluded that avoiding liability to tax was a purpose of the arrangements, but not a main purpose.
The FTT did not accept Euromoney's submission that the purposes of the arrangements were exclusively commercial. Euromoney proposed, for tax purposes, that the transaction be restructured so that an element of consideration payable in cash was replaced with the issue of preference shares. There was no commercial purpose in receiving consideration in that form other than for the tax advantage of being able to use SSE. The avoiding of a liability to capital gains tax was therefore one of the purposes of the arrangements as a whole. However, the FTT also concluded, based on the witness and other evidence before it, that Euromoney’s subjective intention was focused on the commercial purpose, which was a main purpose, and the company considered the tax advantage to be no more than a bonus and not important in the context of the transaction as a whole. The tax advantage was relatively insignificant, representing less than 5% of the total sale consideration.
Comment
The documentary and oral evidence before the FTT demonstrated that Euromoney would not have substituted preference shares for cash if that change had jeopardised the deal. The tax at stake was not significant relative to the overall transaction value and Euromoney did not invest significant effort in exploring the various tax consequences. Accordingly, it is not surprising that the FTT concluded that the anti-avoidance rules contained in section 137 did not deny reconstruction relief under section 135.
Although this is clearly an important decision on the meaning of 'main purpose' in the context of section 137(1), TCGA, it may be of wider relevance as there are a number of other anti-avoidance provisions in the tax code which require an assessment of whether the main purpose, or one of the main purposes, of the arrangements entered into by a taxpayer was the avoidance of a liability to tax.
The decision can be viewed here.