Taxpayer victory in a ‘main purpose’ case

Taxpayer victory in a ‘main purpose’ case

The Tax Tribunal has held that a commercial transaction structured in a tax-efficient way did not have a ‘main purpose’ of tax avoidance.


In Euromoney Institutional Investor PLC v HMRC, the First-tier Tribunal (FTT) considered 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. On the basis of the evidence presented, the FTT held that this structuring did not result in the overall arrangements having a ‘main purpose’ of tax avoidance.

Factual Background

The UK taxpayer company agreed to sell its 50 percent shareholding in a JV company to a third-party buyer. This disposal did not qualify for the substantial shareholdings exemption (SSE).

It was originally proposed that the consideration for the sale would be a mixture of cash (c25 percent) and ordinary shares in the buyer (c75 percent). If this route had been followed, c75 percent of the gain arising from the disposal would have been rolled over into the replacement shares (with any subsequent disposal of such shares after 12 months or more qualifying for the SSE), with c25 percent of the gain being taxed upfront.

However, the final transaction was structured so that the buyer would issue preference shares instead of the cash element, with the intended result that 100 percent of the gain would be rolled over into the shares (with any subsequent disposal of the ordinary or preference shares after 12 months or more qualifying for the SSE).

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

HMRC’s position

HMRC argued that, because an anti-avoidance rule in s.137(1) TCGA 1992 applied, 100 percent of the gain should be taxed upfront.

This rule prevents rollover relief from applying where a share-for-share exchange “form[s] part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to … corporation tax.”

The FTT decision

The FTT agreed with the taxpayer that the relevant ‘arrangements’ here were the sale arrangements as a whole (and not simply the substitution of the cash element of the consideration for the preference shares, as contended by HMRC).

The FTT agreed with HMRC that there was no other commercial purpose for receiving consideration in the form of preference shares other than the tax advantage of being able to utilise the SSE and, therefore, the avoiding of a liability to capital gains tax was also one of the ‘purposes’ of the overall arrangements.

However, the FTT agreed with the taxpayer that avoiding a liability to capital gains tax was not one of the ‘main purposes’ of the overall arrangements. The FTT accepted the taxpayer’s witness evidence that its main subjective purposes were commercial, and the tax considerations were not important in this context, noting that:

  • The tax advantage that arose as a result of the revised transaction structure represented less than five percent of the total sale consideration; and
  • The overall investment of time, effort and expense by the taxpayer in relation to the tax structuring was not significant in the context of the arrangements as a whole.

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