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

Having heard the evidence, the FTT made clear findings of fact which addressed both the commercial reasons for the transfer of the Tower Lease and the role that tax played in the decision-making. There was no challenge to these findings of fact. We have concluded, for the reasons set out below, that there is no error of law in the FTT’s analysis of the law or its conclusions.

The Court of Appeal has recently considered the meaning of “purpose” in the context of the loan relationships unallowable purpose rule in s441 Corporation Tax Act 2009 in BlackRock and Kwik-Fit Group Ltd and others v HMRC [2024] EWCA Civ 434 (“Kwik-Fit”). (A third decision has since been released after the hearing of this appeal, JTI Acquisition Co (2011) Ltd v HMRC [2024] EWCA Civ 652, but we did not consider it necessary to ask the parties to provide additional written submissions in response to this decision or to address it ourselves in our reasoning.) Whilst the parties primarily referred to these authorities in the context of Tower One’s submission that the FTT had confused “the intended effect” of the arrangements with their purpose, we consider it helpful to set out the guidance given in BlackRock at outset.

Falk LJ, in a judgment with which Peter Jackson LJ and Nugee LJ agreed, identified areas of common ground relevant to the loan relationships unallowable purpose rule, including that:

Significantly for present purposes, Falk LJ set out as follows:

“107….The purpose or purposes for which a company is a party to a loan relationship may or may not be the same as, for example, the purpose or purposes for which the company exists, or the purpose or purposes of a wider scheme or arrangements of which the loan relationship forms part. Those other purposes may, for example, encompass the purposes of other actors. There is a contrast here between the unallowable purpose rule and the “targeted anti-avoidance rule” introduced by Finance (No. 2) Act 2015 as ss. 455B-455D CTA 2009. That rule requires consideration of the main purpose or purposes of “arrangements”.”

Then, having considered the decisions in Mallalieu v Drummond [1983] 57 TC 330, MacKinlay v Arthur Young McClelland Moores & Co [1990] 2 AC 239 and Vodafone Cellular Ltd v Shaw [1997] STC 734, Falk LJ set out the following summary:

“124.

So far as relevant to this case, and gathering the points together, I would summarise the key points as follows:

a)

Save in “obvious” cases, ascertaining the object or purpose of something involves an inquiry into the subjective intentions of the relevant actor.

b)

Object or purpose must be distinguished from effect. Effects or consequences, even if inevitable, are not necessarily the same as objects or purposes.

c)

Subjective intentions are not limited to conscious motives.

d)

Further, motives are not necessarily the same as objects or purposes.

e)

“Some” results or consequences are “so inevitably and inextricably involved” in an activity that, unless they are merely incidental, they must be a purpose for it.

f)

It is for the fact finding tribunal to determine the object or purpose sought to be achieved, and that question is not answered simply by asking the decision maker.”

Falk LJ then re-iterated some of these points when setting out the errors in the approach of the FTT and the Upper Tribunal in that appeal, drawing attention to:

Falk LJ identified at [162] that “As Nugee LJ suggested in argument, a simple starting point in ascertaining a person’s purpose for doing something is to consider “why” they did it. While this will not cover all the nuances – and in particular the potential distinction between purpose and motives discussed in MacKinlay – it is a sensible starting point.”

With this clear and authoritative guidance in mind, we proceed to consider Tower One’s submissions as to the four errors of law below.

It was agreed that the arrangements did not in fact achieve a tax-free step-up in base cost for Tower One. However, we agree with Mr Jones’ submissions that paragraph 2(4A) applies where the relevant purpose exists, and that the effect of the arrangements, namely whether or not any tax was in fact avoided, is irrelevant:

Ms Shaw submitted that there is no obvious reason why the question of whether there was tax avoidance should be tested only at the time of the transaction, given that HMRC could subsequently challenge the tax outcome that has been claimed and the anticipated tax benefit may not be available. We disagree. The reason is simply that the legislation applies by reference to the purpose of the arrangements and not by reference to the effect or outcome thereof. This is further reinforced by Falk LJ’s summary in BlackRock, which reiterates at [124(b)] that “object or purpose must be distinguished from effect”.

Ms Shaw submitted at the hearing that the denial of group relief from SDLT is disproportionate, or penal, if there is no actual tax avoidance, and that it is a “radical proposition” to be punished for trying to avoid tax. Ms Shaw submitted that there is no example in reported case law of attempted tax avoidance leading to a penalty. Mr Jones did not offer an example to counter this submission. Nevertheless, we agree with Mr Jones’s submission that paragraph 2(4A) is drafted, and thus operates, differently in comparison with some of the other targeted anti-avoidance rules and it is this difference which leads to the result to which Tower One objects. For example, the transactions in securities rules apply to counteract an income tax advantage which is obtained; if such an advantage is not otherwise obtained, then there is nothing to counteract. By contrast, paragraph 2(4A) can apply to deny group relief from SDLT where the tax avoidance purpose is to avoid liability to a different tax (albeit that a purpose of avoiding liability to SDLT is also within scope). The consequence of this can be that group relief from SDLT may be denied irrespective of whether the tax avoidance purpose is achieved.

Ms Shaw submitted that the effect of the mistaken belief as to the availability of the tax-free step-up was that there is only one purpose of the arrangements. She drew an analogy with the situation where a person travelled to A to attend a conference and visit a museum, but on arrival discovered that the museum was in fact closed. In that situation, Ms Shaw submitted that the purpose of travelling to A was to attend the conference; there can be no purpose of visiting the museum as that had not been possible. We disagree. This is the very confusion between purpose and effect which we reject – a failed, or unachieved, purpose can still be a purpose and this is the case if it was always unachievable (eg the museum had closed permanently some time previously) or if it was not possible at the time (eg a temporary closure or lack of time on the part of the visitor).

There were two aspects of Mr Jones’ submissions that have played no part in our reasoning:

There is therefore no error of law in the FTT’s conclusion at [63] that the fact that arrangements ultimately fail to achieve their purpose will not retrospectively negate the fact that they had that purpose.

Ms Shaw’s second submission was that a purpose of avoiding a liability to tax that was expected to arise in the future, or contingently, cannot amount to a purpose of “the avoidance of liability to tax” under paragraph 2(4A). We disagree, for the two reasons advanced by Mr Jones, namely:

We address these alternative reasons in turn.

Group relief is not available if the transaction forms part of arrangements of which a main purpose is “the avoidance of liability to tax”, and tax means stamp duty, income tax, CT, capital gains tax or SDLT. There is nothing in this language to indicate that a purpose of avoiding liability to tax which will or may arise in the future is not caught.

We do not consider that Parker assists Tower One in this regard. That decision related to the transactions in securities rules, then in s28 Finance Act 1960 (“FA 1960”), and applied where “a person is in a position to obtain, or has obtained, a tax advantage…”. By s43(4)(g) FA 1960, tax advantage was defined as “a relief…from…income tax or the avoidance of a possible assessment thereto…”. Where the section applied, the Inland Revenue could issue a notice to counteract the tax advantage “so obtained or obtainable”. The legislation was thus concerned with counteracting the results of the arrangement, and the speeches of their Lordships need to be read in that light. They were not addressing the purpose of the relevant transactions.

Furthermore, we do not agree with Ms Shaw’s submission that the intended avoidance in this case only arose in the future.

The transactions implemented pursuant to the step plan were intended to give Tower One a base cost in the Tower Lease equal to the market value of the Tower at the time of the Transaction, ie as if Tower One had acquired the Tower Lease for its market value (of £200m) but without any company in the group having to pay tax on the profit of (£170m) that would arise on a direct sale of the Tower or the Tower Lease to Tower One for such a price. The cash benefit of this would only arise to Tower One and the group in the future, or contingently, on the disposal of units. However, the avoidance of tax, namely an increase in the base cost without any company being liable for CT on the “gain” from approximately £30m to £200m, formed part of the arrangements themselves and was not a result of future or contingent events.

The FTT clearly recognised this; it was set out in the memorandum from Mr Stearn in February 2010 which summarised the tax analysis and was set out at [13], the FTT described the intended tax-free step-up in base cost at [17], addressed the expected amount of the CT advantage at [45] and identified that the benefit might take several years to be realised. The FTT concluded at [87(10)] that this involved a course of action designed to conflict with or defeat the evident intention of Parliament, by removing from tax liability some £170m of latent profit that would otherwise have been taxable.

Therefore, to the extent that the FTT proceeded on the basis that the restriction in paragraph 2(4A)(b) may be engaged by a main purpose of the avoidance of a future or contingent liability to tax, that was not an error of law. Furthermore, on the facts as found by the FTT, the avoidance of tax was of a current liability to tax on the latent profit or gain, and not the avoidance of a future or contingent liability to tax.

Ms Shaw’s third submission was that the FTT had confused the intended effect of the arrangements with their purpose. As identified by Mr Jones, there is an obvious tension between this argument and Tower One’s first submission that no tax was actually avoided. However, we recognise that each of the four arguments relied upon by Tower One in the context of Ground 1 was put forward in the alternative.

Ms Shaw submitted that the FTT had been wrong to rely on Newton, where the legislation in issue before the Privy Council applied to arrangements having or purporting to have “the purpose or effect” of avoiding any liability to tax, which was treated as a composite phrase.

We consider that the FTT’s reference to the decision in Newton in its consideration of the meaning of “purpose” was not an obvious choice of authority for this very reason; however, we recognise, as pointed out by Mr Jones, that this authority had been put to the FTT by Tower One. There was clearly potential for reliance on this decision to lead the FTT into misdirecting itself. However, we look at what the FTT actually said. We have summarised the FTT’s reasoning at [31] above, including its reference to Newton, and consider it significant that the FTT referred to intended effects and not effects, stating at [61] that purpose “means the intended effect of the arrangements, not the motive of the taxpayer for wanting to achieve the intended effects”. We agree with Mr Jones’ submission that it is difficult conceptually to express the difference between a purpose (which involves ascertaining the aim or object) and an “intended effect”. We are obviously aware that in BlackRock Falk LJ has confirmed that object or purpose must be distinguished from effect, and that “Effects or consequences, even if inevitable, are not necessarily the same as objects or purposes” ([124(b)]). However, the FTT was not seeking to define purpose by reference to inevitable effects, but those that were intended.

The FTT then proceeded with its explanation of the meaning of “purpose”:

Tower One’s written submissions, whilst challenging various aspects of the FTT’s reasoning and its application of the law to the facts as found, did not make any specific reference to these parts of the Decision, and Ms Shaw did not refer to them in her opening oral submissions. However, Mr Jones took us to these paragraphs, and to the Upper Tribunal’s decision in Seven Individuals, submitting that the FTT was entitled to take this approach.

In Seven Individuals Nugee J had addressed how to approach the question of whether an individual was party to arrangements “the main purpose, or one of the main purposes, of which is the obtaining of a reduction in tax liability by means of sideways relief” and referred to the decision of the House of Lords in Brebner, acknowledging that such case “undoubtedly proceeds on the basis that the question was a subjective one, although the contrary does not appear to have been argued” (at [103]). Nugee J continued at [104] that he was inclined to accept that “in considering what the object of a set of arrangements are, one can look more widely than what was in the taxpayer’s own mind”. He said it would be surprising if the question were intended to be answered by looking at the intentions, motives or purposes of the individual taxpayer alone, without regard to the wider context of why the arrangements took the form they did, how those who devised the arrangements hoped they would work, and the way in which they were promoted to potential participants (at [104]). This was obiter, as Nugee J did not need ultimately to come to any conclusion on the appropriate test (at [107]).

Ms Shaw’s reply was tightly focused on the submissions which had been made by Mr Jones, and she submitted that:

We agree with Ms Shaw, and find it helpful to refer to Falk LJ’s judgment in Kwik-Fit:

“83.

As in BlackRock, it also bears emphasising that, while ascertaining the object or purpose of something involves an inquiry into the subjective intentions of the relevant actor, it is for the fact finding tribunal to determine the object or purpose sought to be achieved, and that question is not answered simply by asking the decision maker (BlackRock at [124f)]). It was for the FTT to reach its own decision on whether there was an unallowable purpose based on all the evidence before it. The case did not depend on obtaining a concession in particular terms in cross-examination, or indeed on framing a question to a witness in a particular way.”

When assessing whether the FTT had misdirected itself at [61] to [62] of the Decision we remain mindful of the clear statements in the authorities that decisions of the FTT should not be scrutinised and read as though they were words of a statute.

If at [61] to [62] the FTT was directing itself that the subjective intentions of persons other than those implementing the arrangements were to be assessed, then that would be a misdirection and an error of law. However, we consider that it would be subjecting [61] to too close a level of scrutiny to conclude that this was the approach being set out. The statements at [62] do arguably veer closer towards such an error of law by focusing on how those who devised the arrangements (in this case, PwC) hoped they would work. However, in the context of the Decision as a whole we conclude that any such error is not material – it is clear throughout that the assessment was being made of the purposes of the parties to the arrangements, albeit by reference to what they were told by PwC as to how the arrangements would work (as the tax analysis was set out in the step plan).

Furthermore, mindful of the clear statements in the authorities that decisions of the FTT should not be scrutinised and read as though they were words of a statute, we read [61] to [66] in their entirety and do not consider that the FTT had misdirected itself by its reference to either Newton or Seven Individuals. We read the FTT as recognising, consistently with BlackRock at [124(f)], that determining the purpose sought to be achieved is not a question that is answered simply by asking the decision maker, and that it may be necessary to look at what Nugee J had described as the wider circumstances to assess the subjective intentions of the decision maker. That is the exercise that was then conducted by the FTT.

The FTT heard evidence from Mr Stearn, who had been a director of Tower One and had sent the memo to the then group finance director which was set out at [13]. We were briefly taken to the transcript of some of the cross-examination of Mr Stearn; Mr Jones was seeking to illustrate that there was what he submitted was an abundance of evidence before the FTT supporting its conclusions, referring, by way of example, to Mr Stearn’s evidence that absent the step-up in carrying value the group would not have carried out the series of transactions but the transfer might have gone directly to the company that became Tower One - and that getting the step-up was the main purpose of what he called the interim step. As there were no challenges to the findings of fact made by the FTT, we did not find it helpful to be taken to the transcript for this purpose. Instead, we focus on the findings of fact made by the FTT, which included:

The FTT had thus made its positive findings as to the transactions that were effected; and was mindful of the matters on which it had not been persuaded by HMRC. The FTT then set out its conclusions at [86] and [87]. The reasoning, which we consider further below, is concise, but needs to be read in the light of the findings of fact which had been made and the FTT’s analysis of the meaning of avoidance of liability to tax and purpose.

The FTT had addressed the meaning of avoidance of liability to tax at [57] to [60], which we have summarised at [31] above. In particular the FTT set out:

“59.

In general, it may be said that it is not tax avoidance to accept an offer of freedom from tax which Parliament has deliberately made, but that it is tax avoidance to adopt a course of action designed to conflict with or defeat the evident intention of Parliament by taking advantage of a fiscally attractive option afforded by the tax legislation without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in tax liability (Inland Revenue Commissioners v Willoughby [1997] 1 WLR 1071 (“Willoughby”), 1079B-G, 1081B-D).

60.

It may also be said that where there are two ways for a taxpayer to carry out a genuine commercial transaction, it is natural for the taxpayer to choose the way that will involve paying the least amount of tax, and that the taxpayer by making that choice cannot for that reason alone be said to be acting with a main purpose of avoiding tax (Commissioners of Inland Revenue v Brebner (1967) 43 TC 705, 718H-I). However, it follows from the previous paragraph above that a taxpayer in this situation may well be acting with a main purpose of avoiding tax if the chosen way conflicts with or defeats the evident intention of Parliament. The mere fact that the taxpayer is carrying out a genuine commercial transaction does not mean that no means adopted for effecting that transaction can ever be tax avoidance.”

The FTT had thus considered both Willoughby and Brebner, as well as drawn conclusions as to the potential implications of these principles, with which we agree.

At [87] the FTT recorded its conclusion that one of the purposes of the arrangements, viewed as a whole, was to achieve the envisaged CT advantage, and that this became one of the main purposes of the arrangements. The FTT does not clearly specify what that envisaged CT advantage was when expressing its conclusion in [87] and [87(3)], but it is clear from its earlier description of the arrangements as well as [87(8)] and [87(10)] that this advantage was the tax-free step-up in base cost for Tower One. The FTT found that this purpose of obtaining the tax advantage amounted to avoidance of liability to tax at [87(6)].

It is well-established that the question of whether the main purpose, or one of the main purposes, of a given set of arrangements was the avoidance of liability to tax is one for the FTT to decide on a consideration of all the relevant evidence and the proper inferences to be drawn from that evidence (eg Lord Upjohn at p30G in Brebner). There was no error of law in the FTT’s reasoning and that is sufficient for us to conclude that this aspect of Ms Shaw’s challenge to the FTT’s conclusions on purpose must fail.

We do, however, address one of Ms Shaw’s specific submissions as regards Brebner, namely that there is a distinction between the purpose of arrangements and the reason for choosing the particular means for giving effect to that purpose.

Before the FTT, Tower One had given the example of a businessperson who travels from A to B to attend a business meeting, and who decides to travel by rail by a particular circuitous route in the belief that a discount will be offered on all future rail travel for 12 months if the trip is undertaken by that specific route. Tower One had submitted that the sole purpose of the journey is to attend the business meeting, and obtaining a discount on future travel is merely the reason for choosing a particular means for achieving this purpose. The FTT rejected this at [65], stating that the overall arrangement is not for a trip from A to B, but rather for a trip from A to B via the particular route chosen. The overall arrangement as a whole has two purposes, namely (1) to attend a business meeting in B, and (2) to obtain a discount on future travel. Even if, at the outset, the businessperson is unaware of the possibility of the discount, and is only proposing to travel from A to B by the quickest route, once that person becomes aware of the possibility of the discount and deliberately decides to travel specifically by the more circuitous route in order to obtain this benefit, the specific route becomes part of the overall arrangement, and obtaining the discount becomes one of the purposes of the trip.

Before us Ms Shaw gave a different example, albeit staying with the theme of train journeys. Ms Shaw put forward the example of wanting to travel from A to B, but choosing to go via C because a direct train from A to B will cost £100 whereas the indirect train via C is free. Ms Shaw submitted that the purpose is to get to B, and the means she has chosen to achieve that objective is by taking the indirect train. The result is a free train journey, but the purpose was not to get a free train journey or even to get to B for free/without paying £100 because neither of those things was an end in itself.

We do not find these various hypothetical examples to be particularly helpful, and consider that they run the risk of distracting the relevant tribunal from the actual question in issue.

We would emphasise that in Brebner the question was whether the transactions in securities rules were precluded from applying on the basis that the transactions were carried out for bona fide commercial reasons and did not have as their main object, or one of their main objects, to enable tax advantages to be obtained. In this context, Lord Upjohn said that where there are two ways of carrying out a genuine commercial transaction it would be “quite wrong, as a necessary consequence, to draw the inference” that, in adopting the route which involved paying no or less tax, one of the main objects is the avoidance of tax. The question whether in fact one of the main objects was to avoid tax is one for the Special Commissioners to decide upon a consideration of all the relevant evidence before them and the proper inferences to be drawn from that evidence. Not only was Lord Upjohn making it clear that the question was to be decided by (here) the FTT, but also that adopting the route which involved paying less tax (or achieving some other tax advantage) did not necessarily mean that a main object was the avoidance of tax.

On the facts as found by the FTT, absent any possible CT advantage, the group would have transferred the Tower Lease from SGSL to Tower One (or another SPV) and this would have been for commercial reasons. Ms Shaw submitted that such a transfer at market value would have given rise to the adverse tax consequences that the group was concerned to avoid – St George would bring into account a trading profit on disposal of the Tower at market value, and there would have been no corresponding deduction for Tower One in the year. HMRC did not dispute that this would have been the result. However, Ms Shaw also recognised in her skeleton argument that a direct transfer at book value would not have resulted in a liability to tax by reference to the market value of the Tower Lease on that transfer if the position of the group was viewed together (as there would be matching transfer pricing adjustments which would have been capable of surrender). As Mr Jones submitted, the group could thus have achieved the commercial result of transferring the Tower Lease to an SPV without adverse tax consequences.

The FTT had set out at [14] the steps in the step plan and a summary of the tax consequences of each step. The FTT then set out its reasoning at [87(7)] to [87(10)] which included that this was not an instance where there were two obvious or standard ways of achieving a commercial aim and Tower One simply chose the way that was least costly in terms of tax; rather this was a bespoke plan that not only reduced or eliminated the tax costs of transferring the Tower but would also confer a very substantial positive financial gain on Tower One. The step plan indicated that the intended effect was to obtain this tax advantage.

There is no error of law in the FTT’s approach to purpose, and the conclusion it reached was one that the FTT was entitled to reach on the basis of the facts as found. We come back to the principle made clear by Lord Upjohn that the question whether in fact one of the main objects was to avoid tax is one for the FTT to decide upon a consideration of all the relevant evidence before it and the inferences to be drawn therefrom.

Ms Shaw’s fourth submission was that even if a purpose of the arrangements is the avoidance of liability to tax it was not a “main” purpose. Ms Shaw relied on the decision of the Court of Appeal in TDS, which included that “main” has a connotation of importance, and that assessing whether a purpose is a main purpose is a comparative exercise.

We agree with Ms Shaw’s submissions as to the approach to be taken to assessing whether a purpose is a main purpose. However, we consider that the FTT did adopt this approach.

The FTT discussed the meaning of “main” in the context of there being more than one purpose and the possibility of there being more than one main purpose:

“68.

It is clear from [the wording of para 2(4A)] that arrangements can have more than one main purpose.

69.

A purpose will be a “main” purpose if its achievement is one of the primary aims of the arrangements. A purpose can be a “main” purpose, even if it is not as significant a consideration as another main purpose. Thus, if arrangements are driven by two particularly significant aims, A and B, as well as other subsidiary aims, both A and B may both be “main” purposes even if the taxpayer considers A to be more important than B.

70.

Indeed, purpose B could be a main purpose of the arrangements, even if the arrangements would not have been entered into at all but for the need to achieve purpose A. Even if purpose A is the sole reason for entering into arrangements in the first place, once the decision to enter into the arrangements has been taken, an additional purpose can become an additional main purpose of the arrangements. Whether this is the case will be a question of fact, depending on the individual case. The question is whether a purpose is one of the main purposes, not whether it is the most important purpose, and not whether the arrangements would be proceeded with in the absence of any of the other purposes.”

The language used here includes that of comparison.

The FTT expressly considered the position where its findings indicated that one purpose was more important than another. The FTT’s findings of fact not only addressed the significance of the expected CT benefit (at [43] “it attached considerable importance”, “expected significant tax benefit”), but it also made findings as to the relative importance of different outcomes. At [42], having found there were commercial reasons for transferring the Tower, the FTT found that if it had not been aware of the CT advantage it would have transferred the Tower directly (ie not only would the transfer have been direct, but a transfer would have happened). This contrasts with the finding at [46] that the group would not have transferred the Tower solely for the CT advantage. The FTT was well aware that there can be multiple purposes and that they can be of differing importance.

The reasoning of the FTT at [87] identified that fulfilment of the tax avoidance purpose was a “major consideration” and “very important”, and held that it was “one of the main purposes of the arrangements” ([87(3)] to [87(5)]).

Ms Shaw submitted that where, absent the commercial purposes, the arrangement would not have been entered into at all, it cannot be said that any tax purpose was a main purpose of the arrangements. Here, we endorse the reasoning of the FTT at [70], set out above. As is clear from [70], whether this is the case will be a question of fact. There may be instances where a group has multiple purposes, of varying degrees of importance, and in that situation it is for the FTT to make findings as to which of these, if any, are a “main purpose”. That analysis may be influenced by its findings as to whether any of these purposes were on their own a sufficient reason for the arrangements to be undertaken. The FTT identified this and reached its conclusion.

There is therefore no error of law in the FTT’s conclusion that the tax avoidance purpose was a main purpose of the arrangements.

The FTT did not make an error of law when applying paragraph 2(4A), and Ground 1 of Tower One’s appeal is dismissed.