Thread by @hselftax

Another interesting UT decision for #TaxNerds (short #Thread)

1/n

https://twitter.com/charteredtax/status/1594590196909035520

Euromoney plc sold some shares for $85m in a commercial transaction. It originally intended to take $21m in cash and the rest in ordinary shares, but at a fairly late stage asked the buyer to give it $21m of preference shares instead of cash.

2/n

The tax benefit was that the initial exchange would qualify as a tax free share for share exchange and after 12 months the prefs would qualify for SSE and so could be redeemed tax free (the original shares did not qualify as they had no dividend rights)

3/n

HMRC clearance was sought for the share for share exchange but was refused. The transaction went ahead anyway.

The tax benefits were not seen as critical to the transaction, and the potential downside (that the receipt of ordinary shares would also be taxable) was missed.

4/n

HMRC argued that the “arrangements” were the $21m pref shares, and that tax avoidance was “a main purpose” of those arrangements.

5/n

The FTT found as facts that:
- the “arrangements” were the whole transaction, not just the preference shares, and
- the potential tax saving of about £2m was not material in the context of the whole transaction, and tax avoidance was not “a main purpose”

6/n

The UT examined both issues in detail, and upheld the FTT decision.

7/n

The case shows the importance of presenting a case well at the FTT - findings of fact will rarely be overturned.

But there is, IMO, a wider point about the decision on “main purpose”

8/n

The Courts have held that a purpose which is “icing on the cake” (Sema) or “merely incidental” (Snell) is not a main purpose.

HMRC tend to argue that this sets a low bar, and any purpose which is not trivial must be “a main purpose”

9/n

Here the Courts were presented with a commercial transaction, which had clearly been altered to give a non-trivial (£2m) tax advantage. But they found that the transaction as a whole remained a commercial one, which did not have a main purpose of obtaining a tax advantage

10/n

This is likely to be helpful elsewhere, particularly in loan finance (s441). HMRC often try to dissect a transaction, focusing on any tax planning steps as being “the arrangements” and then arguing that those arrangements have a main purpose of avoidance.

11/n

This case supports the approach that where the transaction as a whole is commercial, some reasonable tax planning is permitted.

Wholly artificial transactions, or contrived tax planning, will not (and should not) pass this test.

12/12 end