UT-2023-000116 - [2025] UKUT 00183 (TCC)

The TIS provisions date back to section 28 of the Finance Act 1960. Originally directed at tax avoidance transactions known as “bond washing” and “dividend stripping”, the courts have repeatedly warned that the TIS provisions have a wider application. (Footnote: ²) Although the TIS provisions were enacted originally before the introduction of CGT in 1965 and at a time when progressive income tax rates were as high as 98%, the main application of the provisions, since that time, has tended to be directed towards schemes which are designed to convert income into capital receipts, albeit their effect since 1965 has been to prevent a charge to capital gains tax being substituted for a charge to income tax, rather than to prevent tax being avoided entirely.

The Consultation Document in 2009 presaged significant changes to the TIS provisions and these were eventually enacted by the Finance Act 2010. It is these relatively new provisions that are the subject matter of this appeal. We shall return to the Consultation Document and its significance later in our decision.

We should record at the outset that it was common ground that in determining a taxpayer’s main purpose in being a party to the transaction in securities it was necessary to ascertain the subjective intentions of the relevant party (IRC v Brebner [1967] 2 AC 18 at 27 per Lord Pearce and at 30 per Lord Upjohn). We consider this to be a correct statement of the law.

HMRC’s argument is, in effect, that the Taxpayers’ subjective intention was to dispose of their shares in the Buybacks and, by claiming EIS relief, to pay no CGT. We do not think that that statement of the Taxpayer’s subjective intention is in dispute. Indeed, that is the effect of the FTT’s finding at FTT [12], [54] and [55].

It is at this point, however, that we part company with Mr Afzal's submissions and the FTT’s analysis. We accept Mr Peacock’s submission that the income tax advantage, as defined in section 687 ITA 2007, was the effect rather than the purpose of the Taxpayers entering into the Buybacks. In particular, we do not accept that because the Taxpayers’ purpose in entering into the Buybacks was to obtain EIS CGT relief, which resulted for the purposes of section 687 ITA 2007 in an income tax advantage, they necessarily had a main purpose of obtaining that income tax advantage. It seems to us that section 687 does not have the effect of “deeming” a main purpose to exist which does not in fact exist.

It is in this context that the finding by the FTT at FTT [55] that obtaining an income tax advantage “was not a main purpose of entering into the share buyback” is important. That this finding was made in the context of HMRC’s secondary argument is clear enough, but it does not mean that it is somehow irrelevant to the issue that arises in the context of their primary argument on the effect of section 687 ITA 2007 and we reject Mr Afzal's submission to that effect. That finding cannot be compartmentalised in that way.

The Taxpayers accepted that in fact they obtained an income tax advantage: FTT [54]. The FTT’s finding at FTT [55] was that that was not a main purpose of entering into the Buybacks but was, rather, a consequence of the Buybacks. As the FTT said at the end of that paragraph:

“Whilst this meant that they paid no tax on the consideration something which they knew would have been the case had they extracted those sums by way of dividend, this was not a main purpose. It was a CGT play. It was designed to ensure that they obtained the benefit of CGT relief now. They did not have, as a main purpose, the obtaining of an income tax advantage.”

In Blackrock the Court of Appeal considered the “unallowable purpose” test in relation to the loan relationships provisions. The FTT at [119]-[121] of Blackrock Holdco 5 v HMRC [2021] SFTD 267 found at [120] that the “inevitable and inextricable consequence” of the loans in question was (ignoring the application of the main purpose test) a tax advantage. This led the FTT in that case to conclude at [121] that the advantage was a main purpose in entering into the loans.

Falk LJ, with whom Nugee and Peter Jackson LJJ agreed, said at [124]:

“For present purposes 'object' can also be regarded as synonymous with purpose. 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.” (Emphasis added)

Falk LJ continued at [146] and [151]:

“[146] Purpose must be distinguished from effect. Even unavoidable effects are not necessarily the same as purposes.… It cannot therefore be the case that any inevitable consequence can be a purpose.”

“[151]… [T]he FTT made an error of law in proceeding on the basis that the 'inevitable' consequence of tax relief was, without more, a main purpose.”

It may be that in the present appeal the FTT’s findings concerning the purposes for which the Taxpayers entered into the Buybacks were generous to the Taxpayers. Those findings, however, were not challenged before us. On the basis of those findings we conclude that, although the effect of the Buybacks was that the Taxpayers achieved an income tax advantage within the meaning of section 687 ITA 2007, that was not a main purpose in entering into the Buybacks.

Accordingly, we consider that the FTT’s conclusion at FTT [32] that “as a matter of remorseless statutory logic” the Taxpayers’ purpose of crystallising the EIS disposal relief also necessarily constituted a main purpose of obtaining an income tax advantage was an error of law.

We are strengthened in this conclusion by consideration of the statutory background to the introduction of sections 684 and 687 ITA 2007 in 2010. We have already mentioned the Consultation Document. Nowhere in that Consultation Document do we see any evidence of an intention to amend the TIS legislation so that a main purpose of obtaining a CGT exemption should necessarily constitute a purpose of obtaining an income tax advantage.

We asked Mr Afzal whether, under the TIS provisions which preceded the amendments made in 2010, the argument which HMRC now advanced would have been possible. Mr Afzal argued, unconvincingly in our view, that such an argument could have been advanced on the earlier provisions. Mr Peacock submitted that that argument could not have been put forward. In our view, that argument was simply not open to HMRC under the earlier versions of the TIS provisions.

It seems strange that such a fundamental change as that contended for by HMRC, should be wrought without any notice being given and without any discussion in the Consultation Document which heralded the introduction in 2010 of the new sections 684 and 687. That, of itself, suggests that HMRC’s argument is unsound, although it is not necessary to our conclusions which are based on the proposition that something being an inevitable result does not necessarily and without more, and without consideration of subjective intention, make it a main purpose.

Although it forms no part of our reasoning, as an expert tribunal we might add that our own understanding of the earlier TIS legislation was that where transactions were carried out which had a main purpose of avoiding CGT (but with no main purpose of avoiding income tax) (Footnote: ³) the general understanding amongst practitioners was that the TIS provisions simply did not apply.

We have referred above to the parties’ arguments on the necessity for a possible alternative transaction. We think it was a consequence of HMRC’s deeming approach to main purpose, as accepted by the FTT, that it was necessary also, as a matter of analysis, for the FTT to envisage the alternative transaction as being built in, since subjectively speaking no possible alternative transaction was in the minds of the Taxpayers. So we think the possible alternative transaction arguments are just a facet of, or different way of looking at, the main point.

We have not found it necessary to address every argument put forward by the parties. We have, however, carefully considered all of those arguments put forward by Mr Peacock and by Mr Afzal, whose submissions we found to be of great assistance.