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

Mr Afzal KC, appearing with Mr Winter for HMRC, submitted that the FTT did not hold (at FTT [55]) that obtaining an income tax advantage was not the main purpose of entering into the Buybacks – that holding was in relation to HMRC’s secondary argument on the assumption that HMRC had not succeeded on their primary argument.

Mr Afzal submitted that the Taxpayers had, in fact, obtained a tax advantage, as defined. The Taxpayers, he argued, had accepted that, having paid less CGT than the income tax that would have been payable had the consideration for the Buybacks constituted qualifying distributions, they had therefore satisfied section 684(1)(d) ITA 2007 (i.e. they obtained an “income tax advantage” as defined in section 687 ITA 2007). Mr Afzal noted that it was not in dispute that the Taxpayers had obtained an income tax advantage. The quantum of that advantage was the difference between (i) the amount of income tax that would have been payable had the consideration for the Buybacks constituted qualifying distributions, less (ii) the amount of CGT payable (i.e. £nil). In other words, because no CGT was payable, the amount of the income tax advantage was the amount of income tax that would have been payable had the consideration for the Buybacks constituted qualifying distributions.

The requirement that obtaining an income tax advantage was a main purpose was met, according to Mr Afzal, because obtaining the benefit of EIS relief was a main purpose. Although EIS disposal relief was a CGT relief, it was also a type of income tax advantage based on the specific definition contained in section 687(1)(b) ITA 2007. Obtaining EIS disposal relief necessarily amounted to obtaining an income tax advantage according to the statutory wording.

HMRC accepted that there was a difference between “purpose” and “effect”. However, Mr Afzal submitted that nowhere in its analysis did the FTT state that its conclusion as to purpose was based on effect. The FTT (at FTT [25]) stated that:

“The effect of the transaction was to generate an income tax advantage, but [Mr Afzal] needs to go further than that. He needs to show that it was a main purpose.”

Mr Afzal submitted that the FTT could use the effect of what a taxpayer did as a piece of evidence in its assessment of the distinct question of whether the Taxpayers had the requisite purpose. The FTT was well aware that the mere effect of achieving an income tax advantage was not enough to find a purpose of achieving that advantage. Instead, the FTT’s reasoning concerned the subsequent legal characterisation of a factual main purpose of obtaining EIS disposal relief. The FTT found, correctly in Mr Afzal’s submission, that a factual main purpose of obtaining that CGT relief was, in law and as a matter of statutory definition, a main purpose of obtaining an income tax advantage. It was not an error of law for the FTT to apply the definition of “income tax advantage” in section 687 ITA 2007 in seeking legally to characterise the main purpose of obtaining EIS disposal relief. That remained the case, Mr Afzal contended, even though that definition was given in terms of an effect of a transaction.

As to the Taxpayers’ argument that the effect of the FTT’s conclusion was that EIS relief was effectively curtailed, Mr Afzal countered by saying that it was only where a taxpayer carried out a transaction in securities which had a main purpose of obtaining CGT relief and which met all the other requirements of section 684 ITA 2007 that he or she would be at risk of a counteraction notice. In a normal, commercially-motivated, transaction such a relief would not even be a purpose, let alone a main purpose.

Secondly, Mr Afzal addressed Mr Peacock’s arguments in relation to the Consultation Document.

As regards paragraph 3.3 of the Consultation Document, Mr Afzal noted that the paragraph continued by stating: “This would be more relevant for corporation tax.” This was because the definition of “tax advantage” in the TIS code applicable to corporation tax (found in section 709 (1) ICTA 1988) would catch tax advantages from converting a chargeable gain into income. The proposed changes envisaged by the Consultation Document, Mr Afzal argued, would prevent this from happening and that was why paragraph 3.3 of the Consultation Document stated that this was “more relevant for corporation tax” because the definition of tax advantage in the income tax TIS code (at that time section 683 ITA 2007) was fairly clear that it would not catch tax advantages from converting a chargeable gain into income. The version of section 687 ITA 2007 relevant in the present case then put it beyond doubt because it required more income tax than CGT to be payable.

In relation to the Taxpayers’ argument that there had to be an alternative transaction with which to compare the actual transaction, Mr Afzal noted that this argument had been considered and rejected by the FTT at FTT [33] where the FTT considered that the alternative transaction was already built into the definition of income tax advantage. The alternative transaction was the qualifying distribution identified in that definition. The purpose of the TIS provisions was to ensure income tax was not avoided. That purpose would be frustrated if there had to be an alternative transaction but not one bearing income tax.