Tax avoidance not a main purpose of transaction, says UK tribunal

The ruling by the UK's First-tier Tax Tribunal in a decision involving Euromoney, the financial news company, “represents a rare successful outcome for a taxpayer in a ‘main purpose’ case," said Lauren Redhead, a tax expert at Pinsent Masons, the law firm behind Out-Law.

"The Tribunal confirms in its judgment the need to consider the transaction as a whole and highlights the fact that just because there is a tax motive, and just because that tax motive is ‘more than trivial’, it does not automatically follow that it is a main purpose of the transaction," Redhead said.

HM Revenue & Customs (HMRC) had challenged the tax treatment of the sale by Euromoney of shares in one of its subsidiaries to a third party.

It was originally envisaged that the consideration for the sale would be a mixture of cash and ordinary shares issued by the purchaser. However, the deal was changed so that preference shares would be issued by the purchaser instead of the cash, after the group's tax director suggested that this would be more tax efficient.

The revised deal would be more tax efficient if the share-for-share exchange rules applied to the entire exchange because there would be no tax charge on the exchange and then, once the preference shares had been held for at least 12 months, the substantial shareholdings exemption would prevent a tax charge arising when the preference shares were redeemed.

HMRC argued that a capital gain arose on the share-for-share exchange because the anti- avoidance provision in section 137 of the Taxation of Chargeable Gains Act 1992 applied. This provides that the share exchange provisions only apply to prevent a tax liability arising if the exchange is effected for bona fide commercial reasons and does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability for capital gains tax or corporation tax. 

HMRC argued that the share exchange formed part of a scheme or arrangements which had a tax avoidance main purpose so that the share-for-share relief was not available in respect of the preference shares or the ordinary shares issued by the purchaser. They argued that the purpose of the issue of the preference shares could be considered in isolation from the rest of the transaction.

Judge Kim Sukul said that the purpose of the entire share exchange had to be considered and not just the arrangements in relation to the preference shares alone. She said: "It is my finding, taking into consideration the specific circumstances of this appeal, that, in order to reflect the reality of the position, and in accordance with the wording of the statute, the arrangements must be taken as a whole and not limited to the arrangements that concern only the preference shares."

She said that whilst avoiding liability for tax was a purpose of the arrangements taken as a whole, it was not a main purpose.

The judge said that this was supported by her findings that the potential tax saving from the preference shares was not important to Euromoney, which regarded it as no more than a bonus, and the fact that the tax advantage represented less than 5% of the total sale consideration and was seen as relatively insignificant by Euromoney. She also found that tax was not a main driver of the transaction and it would have gone ahead whether or not the tax could be saved – she found that had the preference share request been refused, Euromoney would still have proceeded with the cash deal.

Other relevant factors in the decision were that Euromoney devoted limited resources to the tax aspects of the transaction and had not explored the tax implications and were not aware that the preference shares arrangement could prejudice the availability of the share for share relief in respect of the ordinary shares, the judge said.

Lauren Redhead of Pinsent Masons said: "The judge relied heavily on the evidence before the tribunal in determining the appeal, in particular in respect of the value of the tax saving and the time spent on tax planning, as well as postulating the alternative scenario of what would have happened if such a tax saving could not have been achieved."

"This reinforces the importance of the quality of evidence available when considering the question of main purpose, in particular where this can demonstrate the weighting of all factors, not just tax, to the transaction, as well as the helpful role that witness evidence can play, for example, where witnesses can comment on whether the transaction would still have gone ahead, and if so in what form, had the tax planning not been successful. Collation of evidence as early as possible is therefore likely to be crucial when considering transactions going back a number of years," she said.