UK and International Tax news
Court of Appeal Judgment in Share for Share Exchange Case
Tuesday 7th November 2023
The Court of Appeal has recently issued its judgment and upheld the Upper Tribunal’s decision in favour of the taxpayer in a share for share exchange case in which HMRC had argued that the anti avoidance provision in s.137(1) TCGA 92 prevented relief where the main purpose or one of the main purposes of the arrangement was the avoidance of tax.
In Delinian Ltd (formerly Euromoney Institutional Investor PLC) v HMRC [2023 EWCA Civ 1281], the taxpayer had originally appealed against an amendment made by HMRC to its 2015 corporation tax return which concerned a transaction between taxpayer and the purchaser. EII exchanged its shareholding in a JV company for ordinary and preference shares in the purchaser. However, HMRC considered that EII was taxable on the disposal of its shares because the exchange took place as part of a scheme or arrangement of which one of the main purposes was the avoidance of corporation tax on chargeable gains. The result would be that s.135 TCGA92 was disapplied by s.137(1) TCGA92. The amendment increased the amount of corporation tax payable by EII by approximately £10.5m.
During negotiations, EII had initially agreed to dispose of its 50% holding in the JV company to the purchaser for $80m to be satisfied by ordinary shares (75%) in the purchasing company and cash (25%). The disposal did not qualify for the substantial shareholdings exemption [SSE].
On review by EII’s parent company, the purchaser agreed for the cash part of the consideration to be replaced by preference shares. This would permit 100% of the gain on disposal by EII to be rolled over into the shares of the buyer. If the shares were then held for a minimum period of 12 months, any subsequent disposal should qualify for the SSE.
The UT had agreed with the FTT that the potential tax saving from their preference share request was not important to EII, who regarded it as no more than a bonus. In addition, tax was not a main driver of the transaction, which would have gone ahead whether or not tax could be saved. The tax clearance application made to HMRC did not hold up the transaction timetable as the exchange had already been agreed when the clearance was applied for. EII also believed that there was no tax downside to the exchange, and it was therefore completed without waiting for HMRC’s formal response, even though EII knew that there was a risk that the tax saving would not be obtained.
The UT rejected HMRC’s arguments and held that, based on the evidence and arguments before it, the FTT was entitled to infer that the arrangements did not have a main purpose of avoiding a liability to tax.
On appeal by HMRC, the CA held that, from a purposive point of view, s.137(1) is clearly providing for the situations in which taxpayers will not be permitted to defer their tax when they effect a share exchange. They are allowed to do so if the exchange is for bona fide commercial purposes and if the exchange does not form part of a scheme or arrangements of which the, or a, main purpose is tax avoidance. Put shortly, taxpayers can delay paying tax when they exchange shares, but not if the exchange forms part of an entire scheme which has a main purpose of tax avoidance. S.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.
The CA dismissed HMRC’s appeal.
If you would like further information on this case, please contact Keith Rushen on 0207 486 2378.
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