Taxpayer victory on appeal in Euromoney ‘main purpose’ case

Upper Tribunal upholds ruling that a commercial transaction structured in a tax-efficient way did not have a ‘main purpose’ of tax avoidance.

Upper Tribunal upholds ruling that a commercial transaction structured

The case of Euromoney Institutional Investor PLC v HMRC concerned a commercial sale transaction that had been structured so as to permit part of the sale consideration, which would otherwise have been taxable, to ultimately be received in a tax-exempt manner. The Upper Tribunal (UT) has now upheld the First-tier Tribunal’s (FTT) decision that, on the basis of the evidence presented, this structuring did not result in the overall arrangements having a ‘main purpose’ of tax avoidance.

Factual Background and Summary of FTT Decision

Please see our previous article of 26 April 2021 for a high level summary of the key facts of the case, and the basis for the FTT’s decision.

Amanda Brown QC and Michael Brady of KPMG in the UK instructed counsel on behalf of the taxpayer in front of the FTT and UT. KPMG did not advise on the original transaction structuring.

Summary of UT Decision

The UT rejected both grounds of appeal put forward by HMRC. In essence, HMRC’s first ground of appeal was that:

  • The FTT erred in law in terms of how it determined the scope of the relevant ‘arrangements’ that fell to be tested; and
  • If the FTT had applied the correct legal approach, it would have held that the ‘arrangements’ were simply the tax structuring steps (i.e. the substitution of the cash consideration for the preference shares, which gave rise to the intended tax saving), rather than the overall commercial sale transaction.

The UT rejected this argument holding that:

  • Whether the share-for-share exchange “form[ed] part” of ‘arrangements’ and, if it did, what those arrangements were, are questions of fact for the FTT to be determined according to the ordinary meaning of those words; and
  • The FTT was therefore not compelled to focus on any particular aspect of the transaction (i.e. the tax structuring aspect), and was entitled to hold that the overall commercial transaction was the relevant ‘arrangement’ (of which the exchange formed part).

Secondly, HMRC argued that, even if the FTT followed the correct approach to ascertaining the scope of the ‘arrangements’, the FTT’s conclusion that those arrangements did not have a ‘main purpose’ of avoiding a liability to corporation tax was invalidated by the FTT taking into account the following factors:

  • The size of the intended tax advantage relative to the total sale consideration (less than five percent). HMRC argued this was irrelevant because ‘main purpose’ is a matter of subjective intention and there was no evidence that the taxpayer took this factor into account;
  • The taxpayer’s failure to identify the potential downside of its tax structuring (if HMRC’s argument was correct). HMRC said this was merely an oversight which said nothing about the taxpayer’s main purposes; and
  • The relatively small amount of time, effort and expense incurred by the taxpayer in relation to the tax structuring compared to the deal as a whole. HMRC argued that this said nothing about the importance of the tax advantage (which, said HMRC, was demonstrated by other evidence).

The UT rejected this argument. Proceeding on the basis that ‘main purpose’ is a purely subjective test (but expressing no view as to whether that was correct), the UT held that, on the basis of the evidence and arguments before it, the FTT was entitled to (i) take each of the above points into account; and (ii) draw an inference from them that the arrangements did not have a ‘main purpose’ of avoiding a liability to tax. HMRC had not cleared the high hurdle imposed by Edwards v Bairstow and shown the FTT’s conclusions to be irrational.

Potential Appeal

It remains to be seen whether HMRC will appeal the UT’s decision.