Court of Appeal dismisses HMRC appeal in Euromoney share exchange case
Court of Appeal upholds Upper Tribunal decision that tax avoidance was not one of the ‘main purposes’ of the arrangements ‘as a whole’
HMRC lose appeal to CoA
The Court of Appeal (CoA) unanimously upheld the Upper Tribunal’s (UT) decision (which itself upheld the decision of the First-tier Tribunal (FTT)) that the inclusion of redeemable preference shares (in addition to ordinary shares) as part of the consideration in a commercial share for share exchange on the sale of a company, with a view to claiming the Substantial Shareholding Exemption (SSE) on redemption of those preference shares in 12 months’ time, did not mean that the exchange formed part of ‘arrangements’, one of the main purposes of which was the avoidance of tax, such that s137(1) TCGA 1992 would be engaged and tax relief on the share exchange denied.
Euromoney Institutional Investor plc (Euromoney) owned shares in a joint venture (JV) company called Capital Data. In 2014 a deal was agreed to sell Capital Data to a third party. Euromoney’s share of the consideration for the deal (valued at $85 million) was to be in the form of 15.5 percent of the ordinary shares in a new holding company (Diamond) which would own Capital Data post sale, plus $26 million in cash. Euromoney wanted ordinary shares in Diamond as it wished to retain an investment in Capital Data post sale. Under these terms there would be no tax on chargeable gains arising from the receipt of ordinary shares in Diamond as this would qualify as a share for share exchange under s135 TCGA 1992. However, (due to the terms of the JV) as Euromoney’s original holding did not qualify for SSE, a chargeable gain would arise on the cash element of the consideration. Euromoney therefore renegotiated the deal so that instead of the cash element it would receive preference shares redeemable for cash in one year’s time. By that time those preference shares (as well as the ordinary shares) would qualify for SSE. Thus, there would be no chargeable gain arising on Euromoney’s part of the deal.
HMRC argued (at each stage of the litigation) that inclusion of the preference shares with the intention of no chargeable gain arising meant that the exchange as a whole (i.e. both the ordinary and preference share elements) formed part of arrangements, one of the main purposes of which was to avoid tax.
Euromoney, on the other hand, argued that whilst the inclusion of the preference shares did have the purpose of no chargeable gain arising on the sale, this limited tax purpose was not one of the main purposes of the arrangements as a whole.
HMRC’s principal argument at the CoA was that the FTT (and then the UT) had erred in construing its task to be first to determine what ‘the arrangements’ were and then applying the main purpose test to those arrangements. HMRC argued that instead, the FTT should have identified all possible candidate arrangements, rather than looking for a single set of arrangements. Had the FTT done so, it would have identified that the preference shares ‘arrangement’ was a tax arrangement and from that it would necessarily have followed that this arrangement (of which, on HMRC’s case, the exchange formed part) had tax as a main purpose.
The CoA, like the UT before it, rejected HMRC’s construction of the relevant statutory provisions – in particular the argument that it was necessary to identify all candidate arrangements to see if any of them had a tax main purpose. This was not consistent with the natural meaning of the words of the statute. Moreover, it would effectively make any examination of whether the tax purpose was a ‘main purpose’ redundant as once a ‘tax arrangement’ had been identified, it would inevitably have such a purpose. It would also mean that even a very minor / low value tax driven element of a share exchange would fall foul of s137(1). This could not have been Parliament’s intention.
The CoA also rejected a cross appeal by Euromoney that availing itself of SSE did not constitute ‘tax avoidance’. Whether or not it did so was a matter to be determined by reference to s137 itself. However, given the finding that s137(1) was not engaged, this did not affect the outcome of the appeal.
Angela Savin and Michael Brady of KPMG in the UK instructed Kevin Prosser KC on behalf of the taxpayer in front of the CoA (having previously done so at the UT and FTT). KPMG in the UK did not advise on the original transaction structuring.
