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The outcome of a recent First Tier Tribunal (“FTT”) case highlights some interesting points on the application of the Transfer of Assets Abroad (“TOAA”) rules. We await to see if HMRC will appeal the FTT decision.

The Rialas v HMRC [2019] case considered the s739 Income Tax Act 2007 (the old TOAA rules) in relation to dividends paid between 2005 and 2007.

The Tribunal considered three questions:

  1. Whether the taxpayer was a transferor for s 739 – held not;
  2. whether the motive defence was available – held not; and
  3. whether a right to free movement of capital was infringed - held yes.

The taxpayer, Mr Rialas (“R”), a UK resident who was ordinarily resident and a non-UK domiciliary, owned 50% of Argo, a successful UK company. R wished to buy out his former business partner C to facilitate a future sale of Argo. Therefore, R set up a structure, contributing c£10 (10 Cyprus pounds) to a settlor interested non-UK resident (Cyprus) discretionary trust which acquired an off the shelf non-UK resident company ('F'). Financed by a third-party loan, which was provided on favourable terms by a business friend of R, F acquired the remaining 50% of Argo from R's former business partner (“C”) at a market value price. Over the next few years (namely 2005 – 2007), Argo paid substantial dividends to F on which HMRC sought to tax R under s739 Income Tax Act 2007 (“s739”). Argo was subsequently sold to a third party. The dividends and sale proceeds were used to repay the loan.

There are a number of interesting points arising from the decision:

1) Taxpayer transferor

The FTT concluded R was not the transferor for the purpose of s739 because he did not possess the necessary influence to dictate whether or not C should sell his shares or to whom he should sell them. As such R could not be considered to be the quasi transferor of C's shares.

In addition, the FTT considered the associated operations rules did not apply. In particular, the HMRC argument that formation of a subsidiary company, F, the borrowing of $15m by that company, followed by the acquisition of the shares in Argo, were "associated operations" "in relation to" the C£10 initially contributed to the trust, the FTT concluded, seemed to be stretching the words beyond breaking point.

The judgement continues:

'Paragraph 71. If this argument were correct then it would mean that the establishment of any non-resident trust by a UK resident individual, with however small an initial contribution, could lead to that individual being taxable on the income from any investments which such a trust might acquire, directly or indirectly, from anywhere in the world, even though the whole of the funds required in order to acquire those investments had been borrowed. We do not believe that this is a consequence which could have been in the mind of Parliament or indeed the draftsman of this legislation. This is simply going too far.'


The FTT focused on the shares in Argo as the asset which is being transferred. An alternative analysis might focus on the cash, funded by the loan to F, which was used to purchase the shares in Argo. The FTT accepted that R orchestrated the purchase side of the transaction. This alternative perspective might make R a quasi-transferor.

If the FTT's view of associated operations and in particular paragraph 71 are correct, then it would appear to open wide the TOAA legislation to enable certain offshore structures to escape its provisions.

2) Motive defence

Although not strictly needed given the conclusion in 1), the Tribunal also concluded that the taxpayer could not take advantage of the TOAA motive defence. In their view, the only apparent explanation for the interposition of a non-resident trust between the taxpayer and the shares in Argo, was the reduction of the taxpayer's exposure to UK Inheritance Tax, thereby demonstrating a tax avoidance motive.


Arguably the taxpayer was a little unlucky on this point as the facts showed that that he had not received any specific UK tax advice on this structure but was only aware that an offshore trust was a 'good thing' from a UK Inheritance Tax perspective.

3) Free movement of capital

Although not strictly needed given the conclusion in 1) the Tribunal also concluded that the TOAA legislation was not compatible with the EU principle of free movement because it was penal in nature and that the only effective remedy was to disapply s739.

The analysis was based on a comparison with F and a hypothetical UK holding company receiving dividends from Argo with clear discrimination shown between the two scenarios. Therefore, there is a clear infringement of the principle of free movement of capital.

HMRC argued that the defence of 'the measure is aimed at tax avoidance, and if so, is it justified and proportionate in its pursuit of this objective' applied.

The historic case law on this considered that the relevant EU definition of tax avoidance was based on the Cadbury Schweppes case, i.e. that of something which is totally artificial. The FTT considered that under this approach s739 would not be considered justified as the structure was not totally artificial.

However, a recent case X GmbH v Finanzamt Suttgart – Korperschaften [2019] has changed this approach 'in the context of the free movement of capital, the concept of 'wholly artificial arrangements' cannot necessarily be limited to merely the indications referred to in paragraphs 67 and 68 of the judgment [in Cadbury Schweppes].' In particular 'that concept is also capable of covering, in the context of the free movement of capital, any scheme which has as its primary objective or one of its primary objectives the artificial transfer of profits made by way of activities carried out in the territory of a Member State to third countries with a low tax rate.'

The FTT considered that the provisions of s739 were justified based on this Court of Justice of the European Union case.

However, FTT considered that the provisions of s739 were not proportionate because the effect of s739 was penal because it put R in a worse situation then he would have been if F had been UK tax resident – R was taxable directly on the income and no deduction is available for the interest paid by F.

As it was not possible to conform the TOAA legislation to be compliant with EU rights, s739 was to be disapplied.


This case shows the complexities involved in arguing a free movement of capital defence. Whilst the TOAA legislation was changed in 2012 with the purpose of bringing it line with EU jurisprudence, this decision would suggest that the impact of TOAA is still potentially penal in nature, depending on the relevant facts, and therefore potentially remains not compatible with the free movement of capital.

HMRC could well appeal on points 1 and 3 with the taxpayer cross appealing on 2.