Tax practitioners dealing with motive-driven tax reliefs, exemptions or anti-avoidance rules can get caught in seemingly futile debates with tax authorities. This could be about whether something is a purpose or not of a transaction, a tax choice, the difference between "objective" and "subjective" perspectives or whether a purpose is a "main" purpose or not. Some of this turns on statutory drafting and where Parliament has decided to place the burden of proof; a recent judgment shows how it doesn’t always go all in favour of HMRC, but that facts and being able to demonstrate them can be crucial.
Euromoney Institutional Investor Plc (Euromoney) has successfully appealed to the First Tier Tribunal (FTT) against a corporation tax charge which HMRC had sought in respect of the sale of a joint venture vehicle (called Capital Data Limited (CDL)) by Euromoney in exchange for ordinary and preference shares in the acquirer (DH) in Euromoney v HMRC, 2021 UKFTT 0061 TC.
Euromoney’s aim had been to acquire as large an equity stake as possible in DH in exchange for its shares in CDL. It had originally agreed to sell for ordinary shares amounting to a 15.5% equity stake in DH, and $26m in cash. Late in the day, Euromoney’s tax director had realised that a tax saving could be achieved by restructuring the cash element of the deal as an issue of preference shares, which could be redeemed after a 12-month period with the benefit of the Substantial Shareholding Exemption. The deal was ultimately agreed on that basis.
Euromoney filed its tax return claiming section 135 TCGA 1992 share exchange relief in respect of the transaction. HMRC opened an enquiry and ultimately issued a closure notice amending the return to assert that an additional £10,483,731.87 of corporation tax was payable. Euromoney appealed.
At stake was whether or not share exchange relief under section 135 TCGA 1992 applied to the disposal by Euromoney of the shares in the joint venture company in exchange for the shares received in DH. Where the relief applies, the exchange takes place on a no gain no loss basis; in other words, tax is deferred to a later disposal. Pursuant to section 137(1), relief under section 135 is only available in circumstances where the exchange was “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 to capital gains tax or corporation tax.”
Tax avoidance was clearly - at some, however belated level - a feature of how the transaction was papered; however, the FTT held that, although a purpose of the transaction, it was not the main purpose or one of the main purposes. Section 137(1) of the TCGA 1992 therefore did not disapply the relief in the circumstances.
Particular points to highlight from the FTT’s judgment are that:
- the FTT agreed with Euromoney that the sale arrangements as a whole - and not just the substitution of the cash for the preference shares (as HMRC had argued) - were the relevant arrangements to be considered for section 137(1); and
- he judgment provides a helpful example of where the line lies in considering whether a tax avoidance purpose is one of the main purposes behind a transaction. The FTT accepted Euromoney’s evidence that the company’s clear focus had been on the commercial objectives, whilst the tax structuring was ancillary and represented a relatively low amount in terms of the overall deal and time spent by Euromoney’s team on the deal.
In this case, the FTT was helped by very clear emails demonstrating that Euromoney was prepared to conclude the transaction without the tax benefit of the preference shares: where tax is not the driver behind a transaction it can be helpful to ensure there is clear evidence of this.