UT (Tax & Chancery) UT/2022/0092 - [2024] UKUT 00373 (TCC)

Ms Shaw submitted that the FTT confused the intended effect of the arrangements with the purpose of the arrangements.

In BlackRock Holdco 5 LLC v HMRC [2024] EWCA Civ 330 (“BlackRock”), Falk LJ made plain that purpose (or object) must be distinguished from effect (at [114], [124(b)] and [146]).

In the context of paragraph 2(4A), what matters is the purpose of the arrangements and this is to be ascertained by reference to the subjective purposes of those participating in or giving effect to the arrangements. As such, the FTT was wrong to rely on Newton for the proposition at [61] that ““purpose” means the intended effect of the arrangements”; that something is the intended effect or consequence does not make it a purpose. In that case, the Privy Council was considering a provision of the Australian tax code which rendered void any arrangement which had or purported to have “the purpose or effect” of avoiding tax.

The relevant question, therefore, is “what were the participators’ objectives in entering into the arrangements”, not “what were the intended effects of the arrangements”? Simply because the participators were aware of and intended the anticipated tax advantages does not mean that obtaining those advantages was a purpose of the arrangements.

Applying the relevant question to the facts as found by the FTT, the only purposes of the arrangements were commercial purposes, namely to ring-fence risks and potential liabilities associated with the development and to provide greater financial flexibility by opening up the prospect of securitised borrowing from a wider group of lenders. Moreover, none of the factual findings demonstrate that another purpose of the arrangements was tax avoidance.

Ms Shaw relied on the observation of Lord Upjohn in Brebner at p784 that:

“…when the question of carrying out a genuine commercial transaction, as this was, is considered, the fact that there are two ways of carrying it out,—one by paying the maximum amount of tax, the other by paying no, or much less, tax—it would be quite wrong as a necessary consequence to draw the inference that in adopting the latter course one of the main objects is for the purposes of the section, avoidance of tax. No commercial man in his senses is going to carry out commercial transactions except on the footing of paying the smallest amount of tax involved.”

As the FTT held, it was the bona fide commercial reasons which caused the group to approach its tax advisers “seeking to ensure that transferring the development to an SPV would not give rise to adverse tax consequences” ([42]). Precisely these adverse consequences have flowed from the arrangements as a matter of fact. A transfer of the Tower Lease at market value, directly from SGSL to Tower One, would have resulted in the crystallisation for tax purposes of the latent profit/gain of £170m, and thus in an immediate, accelerated CT charge before it was realised economically. What the step plan sought to achieve was the step-up to market value in the carrying value of the Tower without an immediate tax charge. The fact that the group chose to implement the step plan does not mean that obtaining the tax advantage was a purpose of the arrangements.

Ms Shaw submitted that the FTT failed to appreciate this point. The FTT held:

“66.

Where there are two ways for a taxpayer to carry out a bona fide commercial transaction, one of which involves tax avoidance and one of which does not, and where the taxpayer chooses the way that involves tax avoidance, then tax avoidance will be at least one of the purposes of adopting that course, whether or not the taxpayer has a subjective motive of avoiding tax (Willoughby at 1079C-D, 1081B-D).”

Such a conclusion is manifestly at odds with what is said in Brebner and, moreover, the FTT’s reliance on Willoughby, which concerns the meaning of “tax avoidance”, is misconceived. Whilst that might inform the question of whether the step plan was intended to give rise to tax avoidance, it does not inform the question of whether such tax avoidance was a purpose of the arrangements.

Ms Shaw submitted that [87] does not support the proposition that a purpose (let alone a main purpose) was to achieve a tax advantage: