[2024] UKUT 00152 (TCC)

Under this Ground HMRC submitted that the FTT failed to take account of the fact that the sole (and, in any event, a main) economic basis for the actual transaction entered into was, as they put it in their skeleton argument, “the UK WHT arbitrage resulting from BLM’s reliance on Article 12(1)”. Accordingly, the FTT was wrong to have concluded that BLM’s ability to rely on Article 12(1) was, as per [174], “merely part of the scenery – the “setting” in which BLM made its offer for the SAAD Claim”. Rather, the 20% difference in value of the SAAD Claim in the hands of SICL and BLM provided the fundamental economic basis for the Assignment. HMRC argue that avoiding the liquidation lacuna and late termination risks could not provide any non-tax rationale for the Assignment. The Assignment did not remove either risk: it just changed the party who was subject to the risks. In any event, the liquidation lacuna risk was not factored into the pricing model adopted by BLM and the contingency giving rise to the late termination risk was considered by BLM to be highly likely not to occur.

In HMRC’s submission, the pricing of the transaction clearly demonstrated the sharing of the UK WHT among the parties. The failure of the FTT to understand the economic basis for the Assignment led it to focus, wrongly, on the existence of a market price for the SAAD Claim in a hypothetical market. It should have focused instead on the actual transaction and, if it had done so, it would have been bound to have concluded that UK WHT was the sole (or, in any event, main) reason for the Assignment taking place. By the time of the Trade Date (when the Assignment was entered into) both BLM and SICL knew about their own and their counterparty’s positions in relation to UK WHT. Any commerciality in the actual transaction derived wholly from the fact that there had been UK WHT avoidance. The economic effect of the transaction was similar to a conduit arrangement: interest was being routed from the UK into the Cayman Islands via Ireland and escaping UK tax.

HMRC argued that the case was similar to that of Fisher v HMRC [2021] STC 2072 (a case dealing with the application of the UK’s anti-avoidance provisions involving the transfer of assets abroad) where the Court of Appeal had found that the transaction concerned was intended to avoid betting duty with a view to securing that the company survived: the survival of the company was clearly a non-tax purpose but it could not be dissociated from the means taken to achieve that purpose. Accordingly, the transaction had a main purpose of avoiding tax. The same analysis, in HMRC’s view, applied here. Obviously, a commercial company entered into the transaction to make a profit but the transaction was entered into only because of UK WHT. Once that was properly taken into account, it followed that the Assignment was a clear abuse of Article 12(1) of the UK-Ireland treaty.

The argument that the FTT failed to “take into account” the existence of the “arbitrage” runs into the difficulty that, throughout the Decision, the FTT showed a clear awareness of the economic effect to which HMRC refer: see for example [177]. HMRC seek to escape from this difficulty by arguing that, even if the FTT was aware of the arbitrage, it failed to feature sufficiently prominently in its reasoning and so undermined the “cogency” of its evaluative conclusion. However, for reasons that we explain, in our judgment that simply represents a disagreement with the FTT’s evaluative conclusion and does not establish an error of law.

It was, in our view, appropriate for the FTT to have had regard to the fact that there were potential purchasers of the SAAD Claim for whom UK WHT would not have been an issue and for whom the UK-Ireland treaty would not have been relevant. The existence of other potential purchasers with different tax attributes who were prepared to pay a price higher than 80% of the interest on the SAAD Claim for reasons wholly unconnected to the UK-Ireland treaty was plainly of relevance to both SICL and BLM. The weight to be given to that factor was a matter for the FTT.

In determining whether SICL had a main purpose of improperly taking advantage of the UK-Ireland treaty, the fact that both SICL and BLM were transacting at arm’s length with a view to getting the best price was, in our judgment, relevant to the assessment of the purpose that SICL had in entering into the Assignment. The weight to be given to that factor was for the FTT to determine. We do not accept that the FTT proceeded on the basis that the fact the SAAD Claim was sold by way of an arm’s length price was a complete answer to the application of Article 12(5). The FTT conducted a thorough assessment of all the circumstances leading up to the Assignment and, if it had considered that an arm’s length deal was in itself enough to secure that Article 12(5) did not apply, its judgment would have been very differently structured and would have been considerably shorter.

Nor do we consider that the Court of Appeal’s judgment in Fisher is of any assistance in the determination of this appeal. It was accepted by both parties that the decision was not binding on this Tribunal because the Court of Appeal’s decision had been subsequently reversed by the Supreme Court on different grounds. Nonetheless, the Court of Appeal’s reasoning could be regarded as persuasive.

Fisher concerned a provision of UK statute law in a very different context; and the relevant statutory provisions were explicitly concerned with the question of whether particular transaction concerned had been entered into with a view to avoiding UK tax. As we have explained above, the case before us is a different one: namely, whether BLM, an Irish resident company, has abusively taken advantage of the UK-Ireland treaty. In our view, HMRC’s reliance on Fisher demonstrates the fallacy of their case. They are starting from the premise that, if UK WHT is being avoided, that alone is sufficient to constitute an abuse of the UK-Ireland treaty so long as the mechanism for the avoidance of the UK WHT was the treaty. But, as we have explained above in our discussion of Ground 1, that is the wrong premise and, accordingly, the presence of any UK WHT arbitrage does not conclusively mean that Article 12(5) is satisfied.

Implicit in HMRC’s Ground 2 is the proposition that, if the FTT had focused properly on the “arbitrage” that HMRC considered to form the entire rationale for the Assignment, they would necessarily have concluded that either SICL’s or BLM’s purpose was to “take advantage” of Article 12 of the treaty. However, in our judgment, Article 12(5) did not just invite an analysis of the economic effect of the arrangements (although, of course, that economic effect was an indicator of purpose). The FTT was right to focus on the question raised by Article 12(5), namely whether SICL’s or BLM’s subjective purpose in entering into the Assignment constituted an abuse of the UK-Ireland. There were a number of indications of those purposes. A flaw in HMRC’s Ground 2 is that it seeks to treat the averred existence of “arbitrage” as decisive on its own rather than as an element for the FTT to weigh in the balance.

Accordingly, we dismiss Ground 2 of HMRC’s appeal.