Tower One – An insight into ‘main purpose’ following the UT decision
Our first article on this case focusses on when do arrangements have a main purpose of tax avoidance?
When do arrangements have a main purpose of tax avoidance?
UK tax law is littered with anti-avoidance rules which ask whether tax avoidance (or some similar concept) is “the main purpose, or one of the main purposes” of arrangements. Familiar as these tests are, Tribunal decisions do occasionally shed new light on how they should be interpreted, with potentially broad implications – as the recent decision of the Upper Tribunal in The Tower One St George Wharf Ltd v HMRC [2024] UKUT 373 (TCC) illustrates.
The points emerging from this decision for the interpretation of ‘main purpose’ tests are discussed below – further background to the case, and details of other issues it addresses, are discussed in our separate article in today’s edition.
A fundamental point of interpretation in dealing with ‘main purpose’ tests, surprisingly infrequently discussed in previously decided cases, is whether the purpose of arrangements should be understood in this context in an objective or subjective sense? In other words, is the purpose of an arrangement simply what, on the basis of its terms, it is intended to effect, or is it necessary to look into the minds of the participants to identify their reasons for being party to the arrangements?
In the context of UK anti-avoidance rules, it has usually been assumed that it is the latter, subjective, interpretation which is correct – the best-known example being the decision of the House of Lords in CIR v Brebner [1967] 2 AC 18. This is reflected in the common – if strictly inaccurate – description of these rules as ‘motive tests’. At the same time, however, a series of Privy Council decisions, beginning with Newton v Commissioner of Taxation [1958] AC 450, have robustly adopted a wholly objective interpretation of similarly worded anti-avoidance rules enacted by Commonwealth countries.
The tension between these approaches can be seen in the rather hesitant conclusions of the Upper Tribunal in Seven Individuals v HMRC [2017] UKUT 132 (TCC) at [104], one of the few cases to directly address this interpretative conundrum, albeit without needing to formally decide the point.
In Tower One, the First-tier Tribunal had cited both Newton and Seven Individuals in support of its conclusion that it was dealing with “arrangements of which the main purpose, or one of the main purposes, is the avoidance of liability to tax”. The Upper Tribunal was therefore required to determine whether that meant it had adopted an objective rather than subjective approach, and – more fundamentally – what approach it should have adopted.
In the Upper Tribunal’s view, the correct approach was the subjective one, that is to identify the subjective intentions of the parties to the arrangements. At the same time, however, the Tribunal recognised that the case law showed that although this entailed looking into the minds of the participants, their subjective purposes were to be identified in the light of all the available evidence and not simply on the basis of what they said their purposes to be. This conclusion is an important one, as the Tribunal’s approach strongly suggests that this is then also the case for the many other similarly worded ‘main purpose’ tests in UK tax law.
Whilst acknowledging some ambiguity in how it had expressed its conclusions, the Upper Tribunal went on to hold that the First-tier Tribunal had in reality applied the correct test and reached a conclusion open to it.
The Upper Tribunal’s conclusion on this point also underpinned its answer to some of the alternative grounds of appeal put forward by the taxpayer.
The taxpayer had noted that the tax benefits associated with the arrangements it had entered into were always contingent on future events and that, in any event, it was now accepted that the arrangements were ineffective to secure those benefits. In view of these facts, the taxpayer argued that it was wrong to regard securing these as a purpose of the arrangements.
The Upper Tribunal unsurprisingly disagreed. Once it was accepted that the statutory test was concerned with the subjective intentions of the participants in becoming party to the arrangements, it was irrelevant that those intentions might (or indeed inevitably would be) frustrated – they were still the parties’ intentions at the key time. To do otherwise was to confuse subjective purpose and effect – essentially treating the test as if it were objective rather than subjective.
The Upper Tribunal also rejected the taxpayer’s argument that even if the arrangements had a relevant purpose, it was not a ‘main’ purpose. The Upper Tribunal – in line with earlier case law – emphasised that this was ultimately a question of fact. It took the opportunity, however, to explicitly endorse the First-tier Tribunal’s view that the mere fact that an arrangement would not be entered into in the absence of any commercial purposes does not mean that any tax purpose is incapable of being a ‘main purpose’.
The Upper Tribunal’s conclusions on these interpretative points were unsurprising, but nonetheless provide helpful confirmation of the correct approach in a complex area. The decision is therefore of interest well beyond the particular facts and statutory rule at issue.
