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

Mr Peacock KC, appearing with Mr Hellier for the Taxpayers, submitted that the FTT had found that the Taxpayers’ purpose in entering into the Buybacks was to achieve a capital gains tax a CGT benefit, viz crystallising EIS relief. The FTT further found that, disregarding HMRC’s primary argument, the Taxpayers did not in fact have a main purpose of obtaining an income tax advantage. Consequently, in Mr Peacock’s submission, section 684(1)(c) ITA 2007 was not satisfied and, therefore, the TIS regime could not apply. In essence, Mr Peacock submitted that the FTT erred by confusing the Taxpayers’ purpose in entering into the Buybacks (to obtain CGT relief) with the effect of the Buybacks (to obtain an income tax advantage). Mr Peacock relied on the recent decision of the Court of Appeal in Blackrock HoldCo 5 v HMRC [2024] STC 740 at [144] to [151] (“Blackrock”) which explicitly recognised that purpose should be distinguished from effect.

The effect of the FTT’s decision, in Mr Peacock’s submission, was heavily to circumscribe the application of EIS relief – this could not have been Parliament’s intention when enacting section 687 ITA 2007.

Mr Peacock referred to HMRC’s “Simplifying Transactions in Securities Legislation Consultation Document” of 31 July 2009 (the “Consultation Document”). The Consultation Document preceded the amendments to the TIS legislation which led to the new definition of income tax advantage contained in section 687, which was in force at the time of the Buybacks. At paragraph 3.3 of the Consultation Document it was stated that the new definition of tax advantage contained in section 687 of tax advantage “would make it clear that the TIS legislation does not apply to TiS where an advantage in relation to tax on chargeable gains is obtained.” It was, therefore, clear that Parliament’s intention was not to provide that there was automatically an income tax advantage where the effect of the particular transaction was to produce a lower charge to CGT. Mr Peacock further submitted that the Consultation Document made it clear that the purpose of the new section 687 was to formalise the quantification of the income tax advantage. The Consultation Document also indicated (at paragraph 7.5) that the new quantification of the income tax advantage would be revenue neutral because it was closely based on current HMRC practice.

Mr Peacock submitted that the FTT’s decision marked a substantive change from the pre-existing provisions and constituted an improper broadening of the purpose test as a result of its interpretation of sections 684 and 687.

Finally, Mr Peacock submitted that the FTT had failed to apply the case law on the proper application of the main purpose test contained in section 684. The authorities demonstrated that in order for the main purpose test to be applied there had to be a possible alternative transaction to which the actual transaction could be compared (IRC v Parker [1966] 43 TC 396 at 441 per Lord Wilberforce and Allam v HMRC [2022] STC 37 at [172]). In view of the FTT’s rejection of HMRC’s secondary (i.e. its factual) case, there was no alternative transaction by which the Taxpayers would have extracted value from the company by way of the transaction leading to an income tax charge.