© 2024 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
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N2-5a: Purpose tests
Purpose v. effect​
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- Distinguish from effect
"[114] Thus, in all but obvious cases it is necessary to "look into the mind" of a taxpayer, and object must be distinguished from effect. Both of those points apply equally to the unallowable purpose rules." (Blackrock Holdco 5 LLC v. HMRC [2024] EWCA Civ 330, Falk, Jackson, Nugee LJJJ)
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Purpose v. motive
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- "Purpose" means the intended effect not the motive for wanting that effect
"Therefore, motive is not necessarily the same as object or purpose. Further, "some" results are "so inevitably and inextricably involved" in an activity that they must be a purpose for it. An example of that was Miss Mallalieu's sober garb. Another was the facts of the instant case, where the costs "cannot but have been intended to serve the purpose of establishing a comfortable private home for the partner concerned"." (Blackrock Holdco 5 LLC v. HMRC [2024] EWCA Civ 330, Falk, Jackson, Nugee LJJJ)
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"[61] “Purpose” means the intended effect of the arrangements, not the motive of the taxpayer for wanting to achieve the intended effects. A determination of “purpose” therefore does not necessarily require a determination of the subjective state of mind of the taxpayer, but may be ascertainable from the terms of the arrangements themselves. Where there is a complicated series of transactions that were the result of a concerted plan, and where a consideration of the whole of the transactions shows that there was concerted action to achieve an end of the avoidance of tax, then one of the ends sought to be achieved was the avoidance of liability to tax (Newton v Commissioner of Taxation [1958] AC 450, 465-467)." (The Tower One St George Wharf Limited v. HMRC [2022] UKFTT 154 (TC), Judge Staker)
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Impossibility​
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- The fact that the purpose was not/could not be achieved does not negate the purpose
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"[63] There is a distinction between the purpose of arrangements, and the question whether the arrangements are effective in achieving that purpose. The fact that arrangements ultimately fail to achieve their purpose (for instance, because they ultimately fail to satisfy the necessary legal criteria to produce the intended legal effect) will not retrospectively negate the fact that they had that purpose. Purpose does not mean “end result in fact”, as opposed to the end result that the arrangements were designed to achieve. Arrangements may be intended to achieve a purpose, even if they ultimately fail to achieve it due to an inherent flaw in the design of the arrangements themselves. Thus, arrangements can have the purpose of avoidance of liability to tax, even if ultimately no liability to tax is avoided." (The Tower One St George Wharf Limited v. HMRC [2022] UKFTT 154 (TC), Judge Staker)
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Whose purpose
- Subjective purpose of relevant actor
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"[124] Millett LJ's useful summary brings out the points already referred to derived from Mallalieu and MacKinlay. For present purposes "object" can also be regarded as synonymous with purpose. So far as relevant to this case, and gathering the points together, I would summarise the key points as follows:
a) Save in "obvious" cases, ascertaining the object or purpose of something involves an inquiry into the subjective intentions of the relevant actor..." (Blackrock Holdco 5 LLC v. HMRC [2024] EWCA Civ 330, Falk, Jackson, Nugee LJJJ)
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- Usually of directors for a company (unless bypassed or acting on instructions)
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"[108] It was also common ground that for a corporate entity such as LLC5, which can only act through human agents, it is necessary to consider the subjective purpose of the relevant decision makers. Unless they have been bypassed or are effectively acting on instruction, that will normally be the board of directors. The same would apply to LLC5, although strictly its board was termed a "Board of Managers", appointed pursuant to the terms of its LLC agreement. There was no suggestion that the board of LLC5 had either been bypassed or were acting on instruction when they agreed to enter into the Loans." (Blackrock Holdco 5 LLC v. HMRC [2024] EWCA Civ 330, Falk, Jackson, Nugee LJJJ)
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- Willingness to go along with scheme whatever its purpose may be may justify attribution of purpose of designer of scheme
"iv) If it can be said that the company wishes to go along with such a scheme whatever its purposes might be, it may well be that the company has an unallowable purpose regardless of whether it appreciates that the scheme was designed to secure a tax advantage. It may suffice that those promoting the scheme have that intention;
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[60] For my part, I would agree that the focus should be on the intentions of the taxpayer's decision-makers and that the purposes of a wider scheme are relevant only if they inform those intentions. However, I agree with the UT that, reading its remarks in their context, the FTT would not appear to have been suggesting that what the directing minds of other entities thought was relevant purely in its own right. At any rate, the FTT's comments on Brebner cannot provide a basis for impugning its decision if it can be seen from other parts of its decision that the FTT found that the relevant decision-makers had a main tax avoidance purpose.
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[66] As I read its decision, the FTT concluded that the appellant's directors went along with the scheme which, to their knowledge, the group had adopted for tax reasons. It was in that sense that the "decision makers were at JGI level". The appellant's directors were seeking to fulfil the company's role in a plan which those "at JGI level" had decided on to secure a tax advantage." (JTI Acquisition Company (2011) Limited v. HMRC [2024] EWCA Civ 652, Newey, Lewison, Baker LJJJ)
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Proving purpose
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- Not answered simply by asking the decision maker
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"[83] As in BlackRock, it also bears emphasising that, while ascertaining the object or purpose of something involves an inquiry into the subjective intentions of the relevant actor, it is for the fact finding tribunal to determine the object or purpose sought to be achieved, and that question is not answered simply by asking the decision maker (BlackRock at [124f)]). It was for the FTT to reach its own decision on whether there was an unallowable purpose based on all the evidence before it. The case did not depend on obtaining a concession in particular terms in cross-examination, or indeed on framing a question to a witness in a particular way." (Kwik-Fit Group Limited v. HMRC [2024] EWCA Civ 434, Falk LJ)
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"[124]...(f) It is for the fact finding tribunal to determine the object or purpose sought to be achieved, and that question is not answered simply by asking the decision maker." (Blackrock Holdco 5 LLC v. HMRC [2024] EWCA Civ 330, Falk, Jackson, Nugee LJJJ)
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- "Why" they did it/what they sought to achieve is usually a good starting point
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"[95] First, identifying purpose requires a consideration of subjective intentions. That is necessarily a forward-looking exercise: broadly, what is sought to be achieved, not what is ultimately achieved. It is perfectly obvious that the group sought and expected to make material tax savings." (Kwik-Fit Group Limited v. HMRC [2024] EWCA Civ 434, Falk LJ)
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"[162] As Nugee LJ suggested in argument, a simple starting point in ascertaining a person's purpose for doing something is to consider "why" they did it. While this will not cover all the nuances – and in particular the potential distinction between purpose and motives discussed in MacKinlay – it is a sensible starting point.
[163] There is an obvious answer to that question on the facts of this case. However it might be dressed up, LLC5 became a party to the Loans to obtain a tax advantage." (Blackrock Holdco 5 LLC v. HMRC [2024] EWCA Civ 330, Falk, Jackson, Nugee LJJJ)
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- Tax may be a purpose even if directors specifically put it out of their mind in taking decision if that was only reason for company existing
"[164] As has already been said, the board members of LLC5 were not operating in a vacuum. Mr Kushel was involved in the transaction in any event and the others had been briefed at an earlier stage. Much of the substantive discussion at the board meeting was about tax. The board obviously understood what the Loans were designed to achieve. Although, as already discussed, the purpose or purposes of being a party to a loan relationship cannot simply be elided with the purpose for which the relevant entity exists, in this case LLC5 had no other function. Its sole raison d'être was to enter into the Loans to obtain tax advantages for the BlackRock group.
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[169] I do not consider that these conclusions involve an inappropriate attack on the unchallenged evidence of Mr Kushel or Mr Fleming, or on the FTT's findings of fact. I agree with the UT that there is an analogy with TDS. In that case a conclusion that the company had a tax main purpose in using the relevant shares as it did was found not to be inconsistent with the honestly held view of the relevant director, a Mr Turner, that the shares continued to be held exclusively for the commercial purpose for which they were originally acquired. Similarly, in this case the fact that LLC5 had a tax avoidance main purpose is not inconsistent with board members properly putting the tax benefits out of their minds when deciding whether the transaction was in LLC5's best interests on a standalone basis. The two questions are different.
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[171] I should emphasise that my conclusion that LLC5 had a tax main purpose is a conclusion reached on the particular facts of this case. It does not follow that other debt incurred in connection with a commercial acquisition – as the acquisition of BGI US undoubtedly was – would fall foul of the unallowable purpose rule even if the decision to borrow had regard, as it often would, to tax considerations. The facts of this case include, among other things, the use of a debt-funded UK resident entity in what is otherwise a wholly US-based, and equity funded, ownership chain, the related lack of any commercial rationale for LLC5, and the structure that then had to be put in place to ensure that LLC5 did not have control over the BGI US group, such that LLC5 not only had no commercial rationale but had no real commercial function." (Blackrock Holdco 5 LLC v. HMRC [2024] EWCA Civ 330, Falk, Jackson, Nugee LJJJ)
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- Purpose for which company exists may bear on purpose of entering into loan
"[51] The upshot, as I see it, is that:
i) Even where a company entering into a loan relationship was brought into being to further a wider scheme, the company's purposes in becoming a party to the relationship are not necessarily those for which it was created or those of the wider scheme;
ii) On the other hand, the context, and in particular the purposes of the wider scheme which the company was intended to advance, may, depending on the facts, bear on the company's purposes in entering into the loan relationship;
iii) The company will have a "tax avoidance purpose" within the meaning of section 442 of CTA 2009 if it is seeking to play its part in a scheme which, to the knowledge of the relevant decision-makers, was designed to secure a tax advantage;..." (JTI Acquisition Company (2011) Limited v. HMRC [2024] EWCA Civ 652, Newey, Lewison, Baker LJJJ)
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Inevitable effects
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- Not inevitably limited to conscious purpose (if effect so inevitable and inextricable that it must be a purpose)
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"[116] So while object and effect are not the same, object is not "inevitably limited" to conscious motives. The reality was that Miss Mallalieu obviously needed clothes for warmth and decency, and no doubt would have had to accept that if she was asked. This could not be described as merely an incidental effect or consequence. Her choice of a particular style and colour, which she would not otherwise wear, did not change that inescapable fact." (Blackrock Holdco 5 LLC v. HMRC [2024] EWCA Civ 330, Falk, Jackson, Nugee LJJJ)
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However
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"[170] It is not clear to us what HMRC mean by their criticism that the FTT only considered Dr Allam’s conscious motives. It was common ground that the test as to Dr Allam’s purposes in being a party to the transaction is a subjective test. We cannot see that sub-conscious motives are to be taken into account, although we accept that inferences can be drawn from the primary facts as to a party’s true motives. In this case the FTT did not accept the inference HMRC invited it to draw from the primary facts. It was entitled not to draw that inference.' (Allam v. HMRC [2021] UKUT 291 (TCC), Edwin Johnson J and Judge Cannan)
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- Unavoidable effect not necessarily a purpose
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"[146] Purpose must be distinguished from effect. Even unavoidable effects are not necessarily the same as purposes. This is particularly clear from Lord Brightman's example in Mallalieu of a medical consultant's trip to the South of France (see [113] above). It cannot therefore be the case that any inevitable consequence can be a purpose. Indeed, the authorities spell that out: both Lord Oliver in MacKinlay and Millett LJ in Vodafone refer to "some" consequences or results being inevitably and inextricably involved in particular activities ([119] and [122] above)." (Blackrock Holdco 5 LLC v. HMRC [2024] EWCA Civ 330, Falk, Jackson, Nugee LJJJ)
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- Inevitable tax consequences of taking out a loan do not, of themselves, amount to tax advantage purpose
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"[150] How then should this point be addressed in the context of s.442? The unallowable purpose rule forms part of a code, contained in Part 5 of CTA 2009, which governs the treatment of loan relationships for corporation tax purposes, and which among other things specifically contemplates tax relief for interest and other expenses of raising debt. The corporation tax relief available is obviously a valuable relief. It is unrealistic to suppose that it will not form part of ordinary decision-making processes about methods of funding a company. Indeed, it might well be wrong for directors to ignore that consideration in deciding what is in the best interests of the company concerned. I agree with Mr Prosser's submission that it cannot have been Parliament's intention that the inevitable consequence of taking out a loan should engage the unallowable purpose rules, subject only to consideration of whether the value of the tax relief is sufficient to make it a "main" purpose. Something more is needed.
[151] I therefore agree with BlackRock that the FTT should not have applied the test in Mallalieu as it did. This is not for the reason given by the UT (to the effect that it should simply have applied TDS) because it is not the case that Mallalieu and the later cases that discuss it are irrelevant. Rather, the FTT made an error of law in proceeding on the basis that the "inevitable" consequence of tax relief was, without more, a main purpose." (Blackrock Holdco 5 LLC v. HMRC [2024] EWCA Civ 330, Falk, Jackson, Nugee LJJJ)
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Main Purpose
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- "Main purpose" connotes importance, but may be one of several main purposes
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"[22] We remind ourselves of some general principles culled from the legislation and case law:
(1) The question of whether the appellants had a main purpose of obtaining an income tax advantage is a pure question of subjective fact (Brebner at 30, as approved and applied in Allam).
(2) It is a purpose and not a benefit test, and concerns only an income tax advantage and not a more general tax advantage. So, if a transaction has another purpose so that the obtaining of an income tax advantage is not a main purpose then the motive test is not satisfied even if an income tax advantage actually arises.
(3) Nor is it satisfied if the obtaining of an income tax advantage is not a main purpose but merely a subsidiary purpose.
(4) The test is however satisfied if one of the main purposes of the transactions is to obtain an income tax advantage. In other words, there can be more than one main purpose." (Osmond v. HMRC [2024] UKFTT 378 (TC), Judge Popplewell)
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"The parties were largely agreed in relation to the “ordinary meaning” of this phrase. They agreed that:
(1) the phrase “main purpose or one of the main purposes” was not defined in the Treaty;
(2) however, it was legitimate to interpret the phrase in accordance with relevant UK case law pursuant to Article 3(2) of the Treaty, which specified that terms which were not defined in the Treaty were to be interpreted in accordance with the provisions of the tax law of the relevant contracting state (in this case, the UK);
(3) determining a person’s main purpose was a question of fact - see Inland Revenue Commissioners v Brebner [1967] 2 AC 18 (“Brebner”) at paragraphs 26B-C and 30C-E;
(4) the conclusion of fact was to be made “upon a consideration of all the relevant evidence…and the proper inferences to be drawn from that evidence” - see Brebner at paragraph 30G;
(5) the test required consideration of the subjective intentions of the relevant person - see Brebner at 27D-E and 30B;
(6) the word “main” did not mean “more than trivial”. Instead, it had the connotation of importance - Travel Document Services v The Commissioners for Her Majesty’s Revenue and Customs [2018] STC 723 (“TDS”) at paragraph [48]; and
(7) in order for this test to be satisfied, it was not necessary for the relevant matter - in this case, taking advantage of Article 12(5) - to be the sole purpose or the only main purpose. It was sufficient for the relevant matter to be one of several main purposes." (Burlington Loan Management DAC v. HMRC [2022] UKFTT 290 (TC), Judge Beare)
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- Can still be a main purpose even if less significant than another main purpose
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"[69] A purpose will be a “main” purpose if its achievement is one of the primary aims of the arrangements. A purpose can be a “main” purpose, even if it is not as significant a consideration as another main purpose. Thus, if arrangements are driven by two particularly significant aims, A and B, as well as other subsidiary aims, both A and B may both be “main” purposes even if the taxpayer considers A to be more important than B.
[70] Indeed, purpose B could be a main purpose of the arrangements, even if the arrangements would not have been entered into at all but for the need to achieve purpose A. Even if purpose A is the sole reason for entering into arrangements in the first place, once the decision to enter into the arrangements has been taken, an additional purpose can become an additional main purpose of the arrangements. Whether this is the case will be a question of fact, depending on the individual case. The question is whether a purpose is one of the main purposes, not whether it is the most important purpose, and not whether the arrangements would be proceeded with in the absence of any of the other purposes." (The Tower One St George Wharf Limited v. HMRC [2022] UKFTT 154 (TC), Judge Staker)
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- Charitable purpose may be subsidiary or main purpose depending on the facts
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"[49] For the above reasons we conclude, like the FTT implicitly did, that the practical provision of Relief is not, as argued by Mr Thomas, just part and parcel of the philosophy of Freemasonry so that it must be regarded as being in service of that philosophical aim and incapable of being regarded as a main aim in its own right. In principle, charitable activity is certainly an activity that is capable of being a subsidiary aim in service of a main aim but can also be a separate main aim. It follows that we reject the argument that had the FTT properly addressed the Appellant's case it was bound to conclude that the provision of Relief was subsumed in the philosophical aim." (United Grand Lodge of England v. HMRC [2023] UKUT 307 (TCC), Judges Ramshaw and Poole)
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Tax avoidance purpose
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- Tax avoidance purpose requires alternative transaction that would have incurred more tax
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"[168] It was common ground that for the counteraction provisions to be engaged there will always be an alternative transaction which will involve an income tax charge, as compared to the actual transaction which involved a CGT charge. That is inherent in the requirement that a main purpose of being a party to the actual transaction was to obtain an income tax advantage. Whilst the existence of an alternative transaction is a necessary condition for service of a counteraction notice, it is not a sufficient condition in itself. The FTT recognised, at [210], that the existence of an alternative transaction that might have been considered by the taxpayer would be a factor in identifying the purposes for which the taxpayer was a party to the transaction which did in fact take place." (Allam v. HMRC [2021] UKUT 291 (TCC), Edwin Johnson J and Judge Cannan)
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"[22]...(5) For a person to have a purpose of avoiding income tax there must be an alternative transaction that would incur an income tax cost." (Osmond v. HMRC [2024] UKFTT 378 (TC), Judge Popplewell)
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- Sometimes the alternative transaction is specifically identified by the legislation
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"[33] In response to [the taxpayer's] assertion that there needs to be a consciously considered comparable transaction (something with which we deal in the discussion regarding HMRC's second submission on the main purpose issue) our view is that the alternative transaction is already built into the definition of income tax advantage. The alternative transaction is the qualifying distribution identified in that definition. In essence it is a deeming provision limited only by the availability of distributable reserves Whether or not the parties have any intention of carrying out a transaction in an alternative way, and in particular whether they consciously or subconsciously considered paying the consideration by way of a qualifying distribution, is, when considering the statutory provisions, neither here nor there. The legislation itself identifies the alternative transaction which would incur an income tax cost. It is the qualifying distribution." (Osmond v. HMRC [2024] UKFTT 378 (TC), Judge Popplewell)
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- Significance of the alternative transaction depends on the facts
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"[169]...However, there is no principle that the existence of an alternative transaction will always be a strong factor in identifying those purposes. The significance of the alternative transaction will depend on the facts of the case. In this case the FTT noted that the actual transaction was a very straightforward disposal and the alternative transaction was more complicated and involved share exchanges and dividends. Importantly, it made a finding of fact that Dr Allam did not consider the alternative transaction. Having accepted Dr Allam as a credible witness the FTT was entitled to make that finding on the evidence before it.
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[172]...However, the FTT had found that Dr Allam did not consider the alternative transaction. In those circumstances it is difficult to see how the FTT could have found that Dr Allam had as a main purpose a tax advantage of which he was not aware.
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[177]...HMRC criticise the FTT for not inferring that Dr Allam would only have gone ahead with the transaction if no income tax was payable. We do not know whether this was put to Dr Allam or whether the FTT was invited to make such an inference. We do know that the FTT found that Dr Allam did not consider any alternative transaction." (Allam v. HMRC [2021] UKUT 291 (TCC), Edwin Johnson J and Judge Cannan)
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- Not necessarily required to have subjectively considered the alternative transaction if main purpose is a particular tax treatment
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"[36] But this does not mean, as Mr Gordon seems to imply, that one can simply sleepwalk into the TIS regime. We accept that conscious thought must be given to the entering into of the transaction. But if that conscious thought includes a main purpose of obtaining a CGT benefit or advantage, we cannot see anything absurd about the legislation applying. Indeed, as Mr Afzal accepts, it is only because the appellants have been so frank about their motives that he can run this primary argument." (Osmond v. HMRC [2024] UKFTT 378 (TC), Judge Popplewell)
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- Main purpose of obtaining a CGT relief is necessarily a main purpose of obtaining an income tax advantage
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"[31] We have to apply the legislation to a specific transaction, namely the share buybacks. That is a real life transaction. We have found as a fact that a main purpose of the parties for the share buybacks was to enable the appellants to enable them to crystallise or bank the EIS disposal relief which they had preserved and nurtured for many years.
[32] It therefore follows that, as a matter of remorseless statutory logic, that a main purpose was also to obtain an income tax advantage as, as that phrase is defined. The amount of income tax which would have been paid had the consideration been paid by way of a qualifying distribution was always going to exceed the CGT payable on the consideration in light of the benefit of EIS disposal relief.
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[34] We can only reach this conclusion because the appellants reason for undertaking the share buybacks was so clearly to obtain the benefit of EIS disposal relief. As soon as that is found to be a main purpose, it is necessarily, and as a matter of law, a main purpose of obtaining an income tax advantage." (Osmond v. HMRC [2024] UKFTT 378 (TC), Judge Popplewell)
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- Tax avoidance purpose not excluded by the fact that transaction was in taxpayer's commercial interests
"v) The fact that the decision-makers consider that entering into the loan relationship is in the company's interests for other reasons does not preclude them from having a "tax advantage purpose"; and
vi) A Tribunal determining whether a company had a "tax avoidance purpose" is not required to adopt a "tunnel-visioned" approach looking simply at how the company was proposing to use the money it was borrowing." (JTI Acquisition Company (2011) Limited v. HMRC [2024] EWCA Civ 652, Newey, Lewison, Baker LJJJ)
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Choosing between alternatives based on tax consequences
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- Deliberately structuring as a capital transaction not sufficient to infer main purpose of income tax advantage
"[45]...As Mr Allen said in his evidence, another alternative might have been to extract value from the company by way of a bonus. But that would have been bonkers (we have paraphrased his evidence). Why on earth, he asked rhetorically, would he take money which he didn't need from the company in a tax inefficient way. And we are with him on this. We cannot infer from the appellants structuring of the transactions as a capital transaction that they had a main purpose of obtaining an income tax advantage when entering into that transaction.
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[53] We accept that the appellants knew the time of the share buyback, and had known for years, that value extracted from a company by way of a dividend would bear income tax. And they consciously structured the share buyback to ensure that no such income tax was paid by distributing, to themselves, an amount equal to share premium account as consideration for the share buyback. And so, no CGT was payable because of the application of EIS disposal relief.
[54] The appellants accept that, as a matter of fact, they obtained an income tax advantage.
[55] But in our view, as submitted by [the taxpayer] and at the risk of labouring the point, this was not a main purpose of entering into the share buyback. It was a consequence of so doing. The appellants main purpose was to crystallise EIS disposal. They were concerned that a change of government would affect its availability in their circumstances. They therefore structured the transaction (the share buybacks) to crystallise that relief and did so in a tax efficient way. They did not need the money. There was no point in extracting more than their share premium. Whilst this meant that they paid no tax on the consideration something which they knew would have been the case had they extracted those sums by way of dividend, this was not a main purpose. It was a CGT play. It was designed to ensure that they obtained the benefit of CGT relief now. They did not have, as a main purpose, the obtaining of an income tax advantage." (Osmond v. HMRC [2024] UKFTT 378 (TC), Judge Popplewell - on the alternative hypothesis that a main purpose of obtaining CGT relief did no necessarily mean a main purpose of obtaining an income tax advantage)
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- Tax avoidance not a main purpose where not important and transaction would have gone ahead irrespective
"[32] The FTT made findings of fact about the circumstances in which Euromoney concluded the exchange transaction at [51]-[56]. It found that: (a) the potential tax saving was not important to Euromoney, (b) tax was not a main driver of the transaction which would have gone ahead whether or not tax could be saved, (c) it was Euromoney's intention to proceed with the cash deal if its request for preference shares had been refused, (d) Euromoney devoted limited resources to the tax aspects of the transaction, (e) the application to HMRC for clearance under section 138 did not hold up the transaction timetable, and (f) the exchange was completed without waiting for HMRC's response to that clearance application." Delinian Limited v. HMRC [2023] EWCA Civ 1281 Vos, Snowden, Whipple LJJJ)
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- Reason for choosing a particular means of implementing a purpose may also give rise to another purpose (e.g. tax avoidance)
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"[64] The Tribunal does not accept the Appellant’s argument that there is necessarily a distinction between the purpose of arrangements, and the reason for choosing particular means for giving effect to that purpose. The Appellant gives the hypothetical example of a businessperson who travels from A to B to attend a business meeting, and who decides to travel by rail by a particular circuitous route in the belief that a discount will be offered on all future rail travel for 12 months if the trip is undertaken by that specific route. The Appellant suggests that in this example, the sole purpose of the journey is to attend the business meeting, and obtaining a discount on future travel is merely the reason for choosing a particular means for achieving this purpose. The Tribunal does not consider this to be a valid analysis for purposes of paragraph 2(4A) Schedule 7 FA 2003.
[65] In this example, the overall arrangement is not for a trip from A to B, but rather for a trip from A to B via the particular route chosen. The overall arrangement as a whole has two purposes, namely (1) to attend a business meeting in B, and (2) to obtain a discount on future travel. Even if, at the outset, the businessperson is unaware of the possibility of the discount, and is only proposing to travel from A to B by the quickest route, once that person becomes aware of the possibility of the discount and deliberately decides to travel specifically by the more circuitous route in order to obtain this benefit, the specific route becomes part of the overall arrangement, and obtaining the discount becomes one of the purposes of the trip.
[66] Where there are two ways for a taxpayer to carry out a bona fide commercial transaction, one of which involves tax avoidance and one of which does not, and where the taxpayer chooses the way that involves tax avoidance, then tax avoidance will be at least one of the purposes of adopting that course, whether or not the taxpayer has a subjective motive of avoiding tax (Willoughby at 1079C-D, 1081B-D)." (The Tower One St George Wharf Limited v. HMRC [2022] UKFTT 154 (TC), Judge Staker)
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- Commercial transaction can be undertaken in a way with a main purpose of tax avoidance
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"[117] Finally, I think it follows from the wording of the legislation that even if the overall purpose of any transaction in securities is a non-tax purpose, section 684(1)(c) can still apply, and the transaction be subject to counteraction, if the way in which the transaction is carried out demonstrates that the obtaining of an income tax transaction was also a main purpose. This is, in a sense, merely demonstrating the point that a transaction can have more than one main purpose, as explained above. The transaction can have a non- tax related main purpose but at the same time be carried out in a manner that demonstrates that obtaining an income tax advantage was also a main purpose. Obtaining a tax advantage does not have to be a predominant purpose – it is enough that is simply a main purpose.
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[136] I do not, therefore, accept Mr Timms' evidence that the tax benefit of achieving capital gains tax, rather than income tax, treatment for the extraction of £1.8 million from Jenbest/Proline was merely incidental or, as he put it, “the icing on the cake”. It seems to me that, although there were other commercial and personal (i.e. non tax) purposes involved, one of the main purposes of the reorganisation, and of the way in which it was structured, was to enable the Appellants to achieve an income tax advantage on the subsequent repurchase of the preference shares.
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[142] In any event, as [HMRC] submitted, it is hard to see how the issue and repurchase of the preference shares furthered the objective of facilitating the retirement plans of the Appellants. Even after the repurchase of the preference shares, the three Appellants together still held 75% of the ordinary shares in Jenbest, thus retaining a collective controlling stake, regardless of whether they retired. In fact, they only retired in 2019 after they had sold their ordinary shares to a third party in 2017.
[143] I therefore accept [HMRC's] submission that in reality the main result of the issue and repurchase of the preference shares was the extraction of £1.8 million from Jenbest/Proline by the Appellants and that, indeed, this was a main purpose of that issue and repurchase." (Wroe v. HMRC [2022] UKFTT 143 (TC) Judge Brannan)
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"[9]...I have accepted that the appellant had commercial reasons for carrying out the transaction and therefore that this was one of his main objects in carrying it out. The tax treatment of the transaction was important to the existence and timing of the transaction. If the only object was for Holdings to acquire the appellant's shares there could have been a share-for-share exchange. The tax advantage cannot be said to be an effect rather than an object of the transaction. I find that the tax advantage was one of the main objects of the transaction." (Lloyds v. HMRC [2008] STC (SCD) 681, Judge Avery Jones)
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- But choice between different ways of carrying out genuine transactions based on tax does not necessarily give tax purpose
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"[55] What I think emerges from these passages from Brebner and BlackRock is the importance of the specific facts. As Lord Upjohn indicated, the fact that a genuine commercial transaction has been carried out in a tax efficient way does not necessarily mean that one of the main objects was to avoid tax. Similarly, the fact that regard was had to tax considerations when deciding to borrow will not necessarily involve falling foul of the unallowable purpose rule. The rule will be in point if, in the particular circumstances, a main purpose was securing a tax advantage." (JTI Acquisition Company (2011) Limited v. HMRC [2024] EWCA Civ 652, Newey, Lewison, Baker LJJJ)
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"[48] It seems to us that the point being made at [194] of Hoey, with which we respectfully agree, is that payments of remuneration will be very likely to be deductible, because in most cases the tax effect of the payment is an effect and not a purpose. The mere fact of choosing a tax-effective means of paying remuneration does not give rise to a duality of purpose. As stated at [55] of Scotts Atlantic:
A taxpayer is perfectly entitled to order its affairs in a way which incurs the least tax liability. The mere fact that a choice is influenced or dictated by the tax consequences does not necessarily mean that the choice involves a duality of purpose as regards the expense. The words of Millett LJ are just as relevant and applicable where there is a choice as where there is not: in each case, the question is whether the payment is made exclusively for the purposes of the trade, and that is a question of fact for the FTT.
[49] What the Court of Appeal is saying at [194], it seems to us, is that just as a fiscal motive does not denature a trade (unless it is so powerful that it denatures the activity), a fiscal motive does not normally prevent a payment of remuneration from being deductible. However, in this case the facts found by the FTT supported a conclusion that this was not a normal case, but a variation of the example referred to at [171] of Hoey of a payment being made with the object of artificially reducing the employer's taxable profit." (A D Bly v. HMRC [2024] UKUT 104 (TCC), Judges Thomas Scott and Greenbank)
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"[22]...(6) However when the question of carrying out a genuine commercial transaction is reviewed, the fact that there are two ways of carrying it out - one by paying the maximum amount of tax, the other by paying no, or much less tax - it would be wrong, as a necessary consequence, to draw the inference that in adopting the latter course, one of the main objects is to obtain an income tax advantage. "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" (Lord Upjohn in Brebner)." (Osmond v. HMRC [2024] UKFTT 378 (TC), Judge Popplewell)
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Apportionment to tax avoidance purpose
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- Full apportionment to tax avoidance purpose may be made if there would have been no deduction at all without scheme
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"[80] Seeking to distinguish Fidex, Ms Shaw argued that in the present case the debits are entirely attributable to the need for the appellant to accept funding in order to acquire LTT. "But for" the acquisition of LTT, Ms Shaw said, there would have been no borrowing and thus no debit. That being so, it was submitted, no part of the debits should have been attributed to the unallowable purpose.
[81] In my view, however, Fidex points in the opposite direction. In Fidex, it was held that the debit was wholly attributable to the unallowable purpose despite the company also having had other purposes because "[b]ut for this tax avoidance scheme there would have been no debit at all". If, contrary to the FTT's view, the appellant had a commercial purpose in issuing the loan notes, the present case is analogous to Fidex. It would remain the case that, but for the scheme to secure a tax advantage which was "bolted on" to the purchase of LTT, there would have been no loan relationship and so no debit.
[82] In the circumstances, it seems to me that that the FTT was entitled to conclude that the debits at issue are wholly attributable to the unallowable purpose and, accordingly, that there is no need for any apportionment." (JTI Acquisition Company (2011) Limited v. HMRC [2024] EWCA Civ 652)
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Purpose of contract
- Determined objectively
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"[76] The Appellants highlighted London Capital Group, R (On the Application Of) v The Financial Ombudsman Service Ltd [2013] EWHC 2425 in support of the argument that the purpose to which the statute refers is that of the customer entering into the contract. HMRC contended that the reference to the parties’ intention did not support the Appellants’ argument, per Leggatt J at [20] and [24]:
“In accordance with general principle, the purpose of the contract and the intention of the parties must be ascertained objectively by construing the terms of the contract in its factual setting. It is not relevant to ask what Mr Shrubb or London Capital subjectively intended. The task for the court is to ascertain what purpose and intention reasonable people in the situation of the parties to the contract may fairly be taken to have had. …
…the purpose and intention of the parties to the relevant contract must be determined from what they agreed. If what was done did not accord with what was agreed, that cannot affect the question of whether or not rights under the contract are a regulated investment.”
...
[395] In considering whether the contracts fall within the scope of s420(4)(b), namely whether their purpose or pretended purpose is to secure a profit or avoid a loss by reference to fluctuations in the value or price of property or an index or other factor designated in the contract, we interpret the provision in accordance with the general principle that the purpose of the contract must be ascertained objectively by construing its terms in its factual setting (per Leggatt J in London Capital Group v Financial Ombudsman [2013] EWHC 2425).
[396] In so doing, we reject Mr Prosser’s submission that we should only take account of the employees’ purposes and not those of the Appellants; although the focus in the London Capital case was on customer as the case involved consumer protection, Leggatt J nevertheless expressly referred to ascertaining the purpose and intention of “the parties”..." (Jones Bros Ruthin v. HMRC [2022] UKFTT 26 (TC), Judge Dean)
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Purpose of an arrangement
- Generally refers to purpose of whole arrangement rather than just part
"[46] Secondly, whilst it is true that an exchange is qualitatively different from a scheme or arrangements, that does not make it a natural use of language to describe an exchange as forming part of a tax avoiding part of an overall scheme or arrangements or even part of an exchange as forming part of a tax avoiding part of an overall scheme or arrangements. It is, conversely, a natural use of statutory language to ask whether an exchange (i.e. the entire exchange) forms part of a scheme or arrangements (i.e. the whole scheme or arrangements) of which the, or a, main purpose is tax avoidance. The "scheme" undoubtedly adds motives and intentions and plans to the "exchange", but the scheme cannot exclude a part of the exchange or a part of the scheme on the natural meaning of the requirement that the exchange "forms part of" the scheme.
...
[48]...But the statute is not asking the FTT to break down the negotiation of either an exchange or a scheme. It is simply asking whether the entire exchange agreed did or did not form part of an entire scheme or arrangements of which the, or a, main purpose was tax avoidance.
[49]...Put another way, section 137(1) envisages that there may be tax avoidance so long as that is not the sole or a main purpose of the scheme or arrangements. Parliament's purpose is clear from the language it used." (Delinian Limited v. HMRC [2023] EWCA Civ 1281 Vos, Snowden, Whipple LJJJ)
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- Not necessarily taxpayer's purpose
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"[62] The terms of paragraph 2(4A) Schedule 7 FA 2003 refer to the purpose of the arrangements, not the purpose of the taxpayer in entering into the arrangements. Where arrangements are complex and/or have been devised by specialists other than the taxpayer, regard may therefore also be had to wider considerations such as why the arrangements took the form that they did, how those who devised them hoped that they would work, and the way that those who devised them presented them to the taxpayer(s). (Compare Seven Individuals v Revenue and Customs Commissioners [2017] UKUT 132 (TCC) at [97]-[104])." (The Tower One St George Wharf Limited v. HMRC [2022] UKFTT 154 (TC), Judge Staker)
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