UK and International Tax news
UT Upholds Decision In Main Purpose Case
Tuesday 23rd August 2022
The Upper Tribunal has recently upheld the FTT decision in a case where the taxpayer had structured a commercial transaction in a tax efficient way.
In Euromoney Institutional Investor plc v HMRC [2021] UKFTT 061 (TC), the FTT had held that the anti avoidance provision in s.137(1) TCGA92 did not apply to certain share for share exchanges even though one of the taxpayer’s purposes was the avoidance of a tax liability.
EII had originally appealed against an amendment made by HMRC to its 2015 corporation tax return which concerned a transaction between EII 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.
On appeal by HMRC [HMRC v Euromoney Institutional Investor plc [2022] UKUT 205 TCC], the UT 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.
If you would like further information on the above, please contact Keith Rushen on 0207 486 2378.
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