[2024] UKUT 00152 (TCC)

At [169], the FTT noted that, as there were two relevant parties (SICL and BLM), each could have had a main purpose of “taking advantage” of Article 12(1) of the treaty either for itself or by enabling its counterparty to do so. That meant that there were four permutations which the FTT addressed as Questions 1 to 4 at [173] to [203]. The focus of argument before us was on how the FTT had dealt with Questions 1 and 3. HMRC confirmed at the hearing that it was not, and never had been, part of their case that Questions 2 and 4 were applicable (either party having a main purpose of enabling the other to take advantage of the treaty).

The FTT dealt with Question 1 (whether BLM had a main purpose of “taking advantage” of Article 12(1) for itself) at [173] to [181].

At [174] and [175], the FTT said that it was necessary to distinguish a person’s “purpose” for doing something from that person’s understanding of the consequences of doing it. It characterised BLM’s awareness that Article 12(1) would entitle it to receive Post-Administration Interest free of UK WHT as part of the “setting” in which BLM made its offer to acquire the SAAD Claim rather than an independent “purpose” of that acquisition.

At [176], the FTT reasoned as follows:

At [177] to [180], the FTT considered what it was that HMRC found objectionable about BLM’s acquisition of the SAAD Claim in circumstances where they had not sought to invoke Article 12(5) in connection with BLM’s previous acquisitions of interest-bearing claims against LBIE. The FTT believed that HMRC attached significance to the fact that BLM had paid a purchase price of 92% of the amount of the Post-Administration Interest. The FTT understood HMRC’s submission that this “nicely split” the difference between the 80% figure that SICL could expect after UK WHT and the 100% figure that BLM could expect following successful reliance on Article 12(1) with some “juice for Jefferies as the middle-man in between them”.

At [179], the FTT set out its understanding that, if BLM had acquired the SAAD Claim for 80% of the amount of Post-Administration Interest rather than 92%, HMRC would not have alleged that BLM had a main purpose of “taking advantage” of Article 12(1). The FTT asked why, if that was right, the position should be any different simply because BLM agreed to pay a higher price.

Next, at [180], the FTT compared what it saw as HMRC’s attitude to previous LBIE claims that BLM had purchased with their approach to the purchase of the SAAD Claim. It said that HMRC had “quite rightly accepted” that when it purchased those previous LBIE claims, BLM did not have a main purpose of “taking advantage” of Article 12(1). The FTT concluded that, having done so, HMRC “must logically accept that the same holds true when it comes to determining BLM’s main purposes in acquiring the SAAD Claim”.

The FTT’s conclusion was, accordingly, that BLM did not have a main purpose of taking advantage of Article 12(1) for itself.

The FTT’s analysis of Question 3, namely whether SICL had a main purpose of “taking advantage” of Article 12(1) itself, was at [186] to [201]. At [192], the FTT noted (i) its conclusion that SICL’s only purpose in entering into the transaction was to sell the SAAD Claim for the best available price; (ii) on 8 February 2018, when the commercial terms were agreed, SICL knew only that the purchaser had some kind of entitlement to a withholding tax exemption but did not know that it was relying on Article 12(1) of the UK-Ireland treaty; and (iii) on 12 February 2018 (the Trade Date), SICL knew that the purchaser was BLM and would be relying on Article 12(1) of the treaty. The FTT considered whether these three propositions were sufficient to make “taking advantage” of Article 12(1) one of SICL’s main purposes in entering into the Assignment.

At [193], the FTT said that, if it did, this would be a “somewhat surprising conclusion” because:

The FTT concluded that this could not be the correct effect of Article 12(5). At [195], the FTT said that such an interpretation would have an “enormous impact on the secondary debt market”. At [196] to [200], the FTT explained, by reference to a report from the OECD Committee on Fiscal Affairs entitled “Double Taxation Conventions and the Use of Conduit Companies” (“the Conduit Report”) why the Assignment was conceptually different from cases of “treaty shopping” dealt with in that report since, following the Assignment, SICL retained no ongoing economic interest in the SAAD Claim, having sold it outright. That introduced the FTT’s conclusion at [201] underpinning its determination that SICL did not have a main purpose of taking advantage of Article 12(1) for itself: