Davies – Taxpayers unable to benefit from motive exemption in TOAA or qualify for treaty relief

29 April 2020. Published by Alexis Armitage, Senior Associate

In Andrew Davies & Others v HMRC [2020] UKUT 67 (TCC), the Upper Tribunal (UT) held that the taxpayers did not satisfy the ‘motive exemption’ in the transfer of assets abroad (TOAA) legislation and could not benefit from treaty relief.


Mr Davies, Mr McAteer and Mr Evans-Jones (the taxpayers) wanted to purchase a development property in the UK. A deposit was paid for the property by SA Properties Ltd (SAP), an Isle of Man company. 

As SAP had only undertaken property investment business, its profits were in the form of capital gains and as a non-UK resident, it was not subject to UK capital gains tax. However, the purchase of the property by SAP would have led to SAP carrying on a trade in the UK, the profits of which would then have been subject to UK tax. 

In order to avoid SAP falling within the UK tax net and so as not to lose the deposit that had already been paid, the purchase was instead completed by ABP Properties Ltd (ABP), a Mauritian company. The aim being that profits would benefit from the UK/Mauritius double tax treaty (the treaty). The taxpayers each took out a life policy with Suisse Life & Pensions (Bermuda) Ltd, which wholly owned ABP and the taxpayers' entitlements under their life policies were in turn linked to ABP.

HMRC subsequently issued discovery assessments to each of the taxpayers, on the basis that they were liable to tax on the income of ABP. The discovery assessments were made in reliance on the TOAA legislation in section 739, Income and Corporation Taxes Act 1988 (ICTA), for years 205/06 and section 720, Income Tax Act 2007 (ITA), for years from 2007/08.

The taxpayers appealed to the First-tier Tribunal (FTT), arguing that they were subject to UK tax in relation to the life policies, the proceeds of which were linked to ABP but that they could rely on the motive exemption (in section 741, ICTA, later replaced by section 739, ITA) as the arrangements were not established for the purpose of tax avoidance and so the provisions under which HMRC sought to assess them should not apply (the motive exemption). Should these arguments fail, the taxpayers argued they were not liable to be taxed under the TOAA legislation by reason of Article 7 of the treaty. The FTT held that the taxpayers were not able to bring themselves within the motive exemption, or benefit from the treaty, and therefore dismissed the appeals.  

The taxpayers appealed to the UT.

UT decision

The appeals were dismissed.

The UT considered whether the taxpayers were able to: 

(1) bring themselves within the motive exemption; or 

(2) benefit from the treaty.

Issue 1 

The taxpayers argued that there was no evidence on which the FTT could make a finding that there was a tax avoidance purpose and HMRC had not put the allegation of tax avoidance in cross-examination. The UT, following the reasoning of the Court of Appeal in Travel Document Service & Ladbroke Group International v HMRC [2018] 3 All ER 60, dismissed this ground of appeal finding that the FTT was entitled to make the findings of fact that it had. The UT considered that there was nothing unfair or inappropriate in the way in which HMRC had presented its case and cross-examined the witnesses. The taxpayers' evidence as to their purpose was their argument and a purpose of obtaining pensions did not prevent a finding by the FTT that the pension arrangements they chose also involved the avoidance of tax.

Issue 2

In relation to issue 2, the taxpayers argued that the income of ABP had not previously been subject to tax in the UK and that this should not change when the income was attributed to the taxpayers under the TOAA legislation. The taxpayers relied on Strathalmond v HMRC [1972] 1 WLR 1511 and Bricom Holdings Ltd v HMRC (1997) 70 TC 272, in support of their arguments. The UT agreed with HMRC that article 7 of the treaty deals with the tax treatment of the profits of ABP and not the UK’s powers to tax its own residents, even though the deemed income of its residents is computed by reference to the profits of ABP. After considering the relevant authorities in this area, the UT concluded that it should follow the reasoning in Bricom and that the answer in any particular case depends on the nature of the relevant statutory process. The UT held that the TOAA legislation deemed the profits of ABP to be the income of the taxpayers and therefore that deemed income was chargeable to tax. 


It would appear from this decision that it is not necessary for an allegation of tax avoidance to be specifically put to a taxpayer in evidence and if a taxpayer wishes to rely on a lack of a tax avoidance motive he will need to, in effect, establish a negative.  

The decision also confirms that there is no single rule that determines the treatment of deemed income under a tax treaty. It is necessary to analyse the effect of the specific article and the wording of the particular statutory provisions under consideration in each case. 

The decision can be viewed here. 

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