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

The FTT referred to HMRC’s primary submission (FTT [23]) in the following terms:

“We now consider Mr Afzal's primary submission which is one which we have not seen made by HMRC in any previous case in which, at first blush, caused the judge to raise a quizzical eyebrow. However, for the reasons given below, we think he is correct when he says that, as a matter of law, the [the Taxpayers’] main purpose of being a party to the share buybacks was to crystallise or bank their EIS relief was also a main purpose of obtaining an income tax advantage.”

The FTT continued (FTT [24]-[38]):

“24.

[The Taxpayers] have accepted that the effect of the share buyback is that less income tax has been paid on the consideration would have been the case had it been paid to them as a qualifying distribution. This is because they have obtained EIS disposal relief on the consideration. And so paid no CGT. So, the amount of income tax that would have been paid on the consideration was less in the CGT actually payable.

25.

[Mr Afzal] accepts that this is not the test. The effect of the transaction was to generate an income tax advantage, but he needs to go further than that. He needs to show that it was a main purpose.

26.

He says that there was. His logic runs as follows. The definition of income tax advantage is, essentially, that the actual amount of income tax payable (in these appeals zero as the consideration is allegedly subject to CGT) in respect of the consideration is less than the income tax payable if that consideration had been paid by way of a qualifying distribution.

27.

But if you obtain EIS disposal relief, you must be within the definition of an income tax advantage as the CGT payable is necessarily less than the income tax which would have been paid had the consideration been paid as a qualifying distribution.

28.

So, it must necessarily follow that if you have, as a main purpose, the obtaining of EIS relief, you must necessarily have, as a main purpose, the obtaining of an income tax advantage. A claim for EIS disposal relief is necessarily an income tax advantage and so the main purpose of obtaining that relief must also necessarily be a main purpose of obtaining that income tax advantage.

29.

And we need go no further than that.

30.

Mr Gordon's (Footnote: ¹) view is that this cannot be right that because if someone has a main purpose of obtaining a CGT "benefit" (our words) that automatically means they have a main purpose of obtaining an income tax relief. There must be more. Conscious thought must be given to the alternative transaction which would have generated the higher income tax charge. And, as Brebner shows, simply because someone carries out a transaction in a tax efficient way does not mean that one can infer that they had, as a main purpose, the obtaining of an income tax advantage.

31.

We have to apply the legislation to a specific transaction, namely the share buybacks. That is a real life transaction. We have found as a fact that a main purpose of the parties for the share buybacks was to enable [the Taxpayers] to enable them to crystallise or bank the EIS disposal relief which they had preserved and nurtured for many years.

32.

It therefore follows that, as a matter of remorseless statutory logic, that a main purpose was also to obtain an income tax advantage as, as that phrase is defined. The amount of income tax which would have been paid had the consideration been paid by way of a qualifying distribution was always going to exceed the CGT payable on the consideration in light of the benefit of EIS disposal relief.

33.

In response to Mr Gordon's assertion that there needs to be a consciously considered comparable transaction (something with which we deal in the discussion regarding HMRC's second submission on the main purpose issue) our view is that the alternative transaction is already built into the definition of income tax advantage. The alternative transaction is the qualifying distribution identified in that definition. In essence it is a deeming provision limited only by the availability of distributable reserves Whether or not the parties have any intention of carrying out a transaction in an alternative way, and in particular whether they consciously or subconsciously considered paying the consideration by way of a qualifying distribution, is, when considering the statutory provisions, neither here nor there. The legislation itself identifies the alternative transaction which would incur an income tax cost. It is the qualifying distribution.

34.

We can only reach this conclusion because [the Taxpayers’] reason for undertaking the share buybacks was so clearly to obtain the benefit of EIS disposal relief. As soon as that is found to be a main purpose, it is necessarily, and as a matter of law, a main purpose of obtaining an income tax advantage.

35.

Mr Gordon observes that this would then bring taxpayers into the ambit of the TIS regime which were never intended to be so affected by it. But the TIS regime is intended to be a freestanding anti-avoidance provision and, in our view, deliberately casts its net very widely. And indeed, when it was introduced in 1960, it was, in shorthand, designed to ensure that individuals who sought to structure a transaction in a way to avoid paying income tax which might otherwise have been justifiably payable on sums extracted by an income taxable distribution should be brought back into the income tax net. Effectively schemes which "converted" income to capital were to be subject to the TIS regime. And so, it is unsurprising to us that where someone has, as a main purpose of entering into a transaction, the obtaining of a CGT benefit, that person is potentially within the ambit of the TIS regime. As a matter of statutory construction, when considering the legislation in its context and in a purposive way, we do not think that this interpretation leads to injustice.

36.

But this does not mean, as Mr Gordon seems to imply, that one can simply sleepwalk into the TIS regime. We accept that conscious thought must be given to the entering into of the transaction. But if that conscious thought includes a main purpose of obtaining a CGT benefit or advantage, we cannot see anything absurd about the legislation applying. Indeed, as Mr Afzal accepts, it is only because [the Taxpayers] have been so frank about their motives that he can run this primary argument.

37.

We can see no principled reason why a main purpose of obtaining a CGT benefit or advantage cannot also be a main purpose of obtaining an income tax advantage. On both a literal and purposive interpretation of the legislation it can be. And it is our view that Mr Afzal's submission regarding the law and its application to these [Taxpayers] is correct.

38.

For these reasons we conclude that, as a matter of law, [the Taxpayers] did have, as a main purpose of entering into the share buyback, the obtaining of an income tax advantage.”

The FTT then turned to consider HMRC’s secondary and alternative submission, viz that the evidence showed that the Taxpayers did have a main purpose of obtaining an income tax advantage when entering into the Buybacks (FTT [39]-[56]):

“39.

We now consider Mr Afzal's secondary submission. He says that if we are against him on his primary submission, then the evidence shows that [the Taxpayers] did have a main purpose of obtaining an income tax advantage when entering into the share buybacks.

40.

He submits that [the Taxpayers] knew that if they had taken the consideration by way of qualifying distribution, that it would have been subject to income tax save to the extent that it represented a return of capital. The consideration therefore was calculated to ensure that there was no such excess, and the £20 million or so paid for the share buybacks was all a return of capital. So conscious thought was given to the way in which the transaction was structured so as to ensure that no income tax was paid on the consideration. This is clear from both the oral evidence, and the way in which the buybacks were structured (as a capital transaction with payment made out of share premium).

41.

Mr Gordon says that the evidence shows that no conscious thought was given to taking the consideration by way of distribution. Indeed, the evidence clearly shows that [the Taxpayers] did not want to extract any value from the company at all. They were sitting on piles of cash and the last they wanted was to extract more. If the crystallisation of EIS disposal relief could have been obtained without undertaking any form of transaction, then that is what [the Taxpayers] would have done. But their advice was that it was not possible to achieve that crystallisation without a real-life transaction. If [the Taxpayers] did have any purpose of obtaining an income tax advantage by effecting the share buyback, that was a subconscious motive and should be discounted.

42.

Shortly stated, we are with Mr Gordon on this point. We have accepted, and found as a fact, that [the Taxpayers] did not wish to extract funds from the company. It was not as though they wished to and consciously chose between two alternative ways of achieving this at the lowest tax cost. Nothing could be further from the truth.

43.

It was inevitable that to achieve their stated purpose, the transaction needed to be a capital transaction to which CGT would be prime facie applicable. We do not see this as evidence from which we can infer that [the Taxpayers] had as a main purpose the obtaining of an income tax advantage.

44.

We do not believe that the legislation applies where someone, having undertaken a transaction which has a certain tax consequence, is required to look around to see whether there are other, detrimental, tax consequences of that transaction and then compare the tax consequences of the actual transaction with those detrimental tax consequences to decide whether there was a main purpose of obtaining an income tax advantage. This is what HMRC appear to be doing in this case. Having taken the real-life transaction, namely a share buyback consideration for which was paid by a return of share premium, they have looked around to see what alternative transactions might be (a qualifying distribution) and said that that is evidence that [the Taxpayers] had a tax avoidance motive.

45.

But we do not accept this. As Mr Allen said in his evidence, another alternative might have been to extract value from the company by way of a bonus. But that would have been bonkers (we have paraphrased his evidence). Why on earth, he asked rhetorically, would he take money which he didn't need from the company in a tax inefficient way. And we are with him on this. We cannot infer from [the Taxpayers] structuring of the transactions as a capital transaction that they had a main purpose of obtaining an income tax advantage when entering into that transaction.

46.

The same is true of Mr Afzal's submission that further evidence of a main purpose of obtaining an income tax advantage is the fact that the consideration was tailored specifically to ensure that there was no income tax payable on the share buyback as it represented a return of capital on which no income tax was payable.

47.

Mr Afzal submits that the fact that [the Taxpayers] did not require the consideration is an irrelevance. We think it is highly significant. The transaction did not proceed on the basis that [the Taxpayers] needed a certain amount of money from the company and then decided how best to extract it paying as little tax as possible. The share buyback was undertaken with some reluctance as it was the only way to crystallise the EIS disposal relief. It is inevitable, therefore, that to obtain the benefit of that relief, the transactions would be structured in a tax efficient way.

48.

The purpose was achieved only if there was to be no income tax payable and this meant that the maximum to be extracted was limited to a return of share capital. It would have been bonkers to have extracted more than the amount of share capital, as the excess would have been subject to income tax. And, paraphrasing Lord Upjohn, no commercial man in their right mind is going to structure a transaction so that he pays the maximum amount of tax.

49.

Mr Afzal cites Lloyd to support his position where it was found that the taxpayer's motive in that case was to obtain retirement relief. "The tax treatment of the transaction was important to the existence and timing of the transactions". Mr Gordon's view is that in the case of these [Taxpayers], that tax advantage was an effect rather than an object of the transactions.

50.

The difference between Lloyd and these appeals, is that in Lloyd it was possible for the judge to posit a reasonable alternative transaction namely "if the only object was for Holdings to acquire the appellant's shares there could have been a share for share exchange". On the facts of these appeals, there could not realistically have been an alternative transaction which would have achieved the same object. And it is clear from the evidence, and from our findings of fact, that it would be both unusual, generally, to extract funds from EIS companies by way of distribution, and that, in the specific circumstances of these [Taxpayers], there was no realistic possibility that they would wish to extract funds either at all, or by way of such a distribution. We do not think that a dividend from the company is a relevant alternative transaction against which an income tax advantage should be tested.

51.

So, [the Taxpayers] sensibly structured the share buyback so that they could bank their maximum EIS disposal relief. This meant that the maximum amount that could be paid as consideration for the shares was reflected by the value of their share premium accounts.

52.

It is true that at the time of the share buyback, the distributable reserves of the company were about £36 million. And so, theoretically, the shares could have been repurchased for that amount. But we reject any suggestion that this is an alternative transaction against which we should test whether [the Taxpayers] had an income tax advantage motive. This might have been the case had they wanted to extract money from the company but had restricted it to the £20 million reflected by the share premium account. But the facts do not show this.

53.

We accept that [the Taxpayers] knew the time of the share buyback, and had known for years, that value extracted from a company by way of a dividend would bear income tax. And they consciously structured the share buyback to ensure that no such income tax was paid by distributing, to themselves, an amount equal to share premium account as consideration for the share buyback. And so, no CGT was payable because of the application of EIS disposal relief.

54.

[The Taxpayers] accept that, as a matter of fact, they obtained an income tax advantage.

55.

But in our view, as submitted by Mr Gordon and at the risk of labouring the point, this was not a main purpose of entering into the share buyback. It was a consequence of so doing. [The Taxpayers’] main purpose was to crystallise EIS disposal. They were concerned that a change of government would affect its availability in their circumstances. They therefore structured the transaction (the share buybacks) to crystallise that relief and did so in a tax efficient way. They did not need the money. There was no point in extracting more than their share premium. 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.

56.

If, therefore, we had not found for HMRC on their primary submission, we would have found against them on their secondary submission.”