Agreement can’t be said as not for ‘tax avoidance’ mere because ultimately no tax was avoided: UK Tribunal
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Case Details: Tower One St George Wharf Ltd. v. Commissioners for Her Majesty’s Revenue and Customs - [2022] 138 taxmann.com 430 (TC-UK)
Judiciary and Counsel Details
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- Christopher Staker, J.
- Malcolm Gammie QC, & Herbert Smith Freehills, for the Appellant.
- Michael Jones QC, the General Counsel & Solicitor for the Respondent.
Case Proceedings
Facts of the case:
• There were bona fide commercial reasons for the company who was legal owner of the Tower for transferring the Tower to the Appellant company, a special purpose vehicle (“SPV”) in the same group, namely to ring-fence risks and potential liabilities associated with the development, and to provide greater financial flexibility by opening up the prospect of securitized borrowing from a wider group of lenders. These purposes could have been achieved even if legal owner company had directly transferred the property to the appellant company (APV)
• The group’s tax advisers considered that if the Tower was transferred to the Appellant via a particular series of steps, a significant corporation tax advantage could be achieved. Pursuant to this advice, the Tower was transferred to the Appellant by a series of steps which were all executed on the same day.
• These steps included the grant by the group company that legally owned the Tower (“SGSL”) of a 999-year lease to another group company (“B64”) at book value which was significantly less than market value, a transfer of ownership of B64 itself from another group company to the Appellant, followed by a transfer of the lease from B64 to the Appellant at book value. The Appellant recognized the intended corporation tax benefit in its company tax return, but following an HMRC enquiry into that return, the Appellant accepted that in fact no such benefit was available. The consequence was that the corporation tax position of the Appellant was ultimately no more advantageous, and possibly less advantageous, than if the Tower had been transferred directly from SGSL to the intended SPV.
• The land transaction return filed by the Appellant in respect of its acquisition of the lease from B64 included a claim for SDLT group relief under Schedule 7 of the Finance Act 2003 (“FA 2003”), as did the land transaction return filed by B64 in respect of the initial grant of the lease by SGSL to B64. Following a review, HMRC decided that SDLT group relief was not available to the Appellant, and issued an assessment to SDLT based on the market value of the lease at the time of its acquisition by the Appellant. The Appellant appeals against that assessment.
• Appellant company’s contention was that since the steps did not achieve the corporation tax saving that company originally believed ould result, it cannot be said that ” the transaction forms part of arrangements of which the main purpose, or one of the main purposes, is the avoidance of liability to tax” and attracts disallowance of group relief claim under Paragraph 2(4A)(b) of Schedule 7 FA 2003. [“Tax” here means stamp duty, income tax, corporation tax, capital gains tax or tax under this Part.]
Held:
• Part 1 Schedule 7 of UK FA 2003 provides for a form of relief from SDLT known as “group relief” (s 62(1) and (2) FA 2003). Paragraph 1(1) Schedule 7 FA 2003 provides that “A transaction is exempt from charge if the vendor and purchaser are companies that at the effective date of the transaction are members of the same group”. Subsequent sub-paragraphs of paragraph 1 Schedule 7 FA 2003 determine when companies will be members of the same group for purposes of this provision.
• Paragraph 2(4A) of Schedule 7 of UK FA 2003 provides that Group relief is not available if the transaction— (a) is not effected for bona fide commercial reasons, or (b) forms part of arrangements of which the main purpose, or one of the main purposes, is the avoidance of liability to tax.
• Admittedly, clause (a) of Paragraph 2(4A) of Schedule 7 is not attracted.
• The effect of clause(b) of paragraph 2(4A) Schedule 7 FA 2003, read together with paragraph 2(5) Schedule 7 FA 2003, is to disallow group relief if (1) the transaction on which SDLT would (but for any group relief) be chargeable is part of a scheme, agreement or understanding, whether or not legally enforceable, and (2) a main purpose of that scheme, agreement or understanding is avoiding liability to tax.
• The expression “avoidance of liability to tax” is not defined for purposes of paragraph 2(4A) Schedule 7 FA 2003, apart from the fact that the provision makes clear that it refers to avoidance of liability to stamp duty, income tax, corporation tax, capital gains tax and/or SDLT.
• In general, it may be said that it is not tax avoidance to accept an offer of freedom from tax which Parliament has deliberately made, but that it is tax avoidance to adopt a course of action designed to conflict with or defeat the evident intention of Parliament by taking advantage of a fiscally attractive option afforded by the tax legislation without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in tax liability (Inland Revenue Commissioners v Willoughby [1997] 1 WLR 1071 (“Willoughby“), 1079B-G, 1081B-D).
• It may also be said that where there are two ways for a taxpayer to carry out a genuine commercial transaction, it is natural for the taxpayer to choose the way that will involve paying the least amount of tax, and that the taxpayer by making that choice cannot for that reason alone be said to be acting with a main purpose of avoiding tax (Commissioners of Inland Revenue v. Brebner (1967) 43 TC 705, 718H-I). However, it follows from the previous paragraph above that a taxpayer in this situation may well be acting with a main purpose of avoiding tax if the chosen way conflicts with or defeats the evident intention of Parliament. The mere fact that the taxpayer is carrying out a genuine commercial transaction does not mean that no means adopted for effecting that transaction can ever be tax avoidance.
• “Purpose” means the intended effect of the arrangements, not the motive of the taxpayer for wanting to achieve the intended effects. A determination of “purpose” therefore does not necessarily require a determination of the subjective state of mind of the taxpayer, but may be ascertainable from the terms of the arrangements themselves. Where there is a complicated series of transactions that were the result of a concerted plan, and where a consideration of the whole of the transactions shows that there was concerted action to achieve an end of the avoidance of tax, then one of the ends sought to be achieved was the avoidance of liability to tax (Newton v Commissioner of Taxation [1958] AC 450, 465-467).
• The terms of paragraph 2(4A) Schedule 7 FA 2003 refer to the purpose of the arrangements, not the purpose of the taxpayer in entering into the arrangements.
• Where arrangements are complex and/or have been devised by specialists other than the taxpayer, regard may therefore also be had to wider considerations such as why the arrangements took the form that they did, how those who devised them hoped that they would work, and the way that those who devised them presented them to the taxpayer(s). (Compare Seven Individuals v Revenue and Customs Commissioners [2017] UKUT 132 (TCC) at [97]-[104]).
• There is a distinction between the purpose of arrangements, and the question whether the arrangements are effective in achieving that purpose. The fact that arrangements ultimately fail to achieve their purpose (for instance, because they ultimately fail to satisfy the necessary legal criteria to produce the intended legal effect) will not retrospectively negate the fact that they had that purpose.
• Purpose does not mean “end result in fact”, as opposed to the end result that the arrangements were designed to achieve. Arrangements may be intended to achieve a purpose, even if they ultimately fail to achieve it due to an inherent flaw in the design of the arrangements themselves. Thus, arrangements can have the purpose of avoidance of liability to tax, even if ultimately no liability to tax is avoided. (1) This follows from the wording of paragraph 2(4A) Schedule 7 FA 2003, which speaks of the avoidance of liability to tax being the purpose of the arrangements, rather than of it being the end result or effect of the arrangements.
• Any other conclusion would lead to anomalous results. Paragraph 2(4A) Schedule 7 FA 2003 does not itself prohibit arrangements that have the avoidance of liability to tax as a main purpose, nor does it seek to undo the effects of the avoidance of the liability to tax. The only effect of paragraph 2(4A) is to deny the availability of group relief from SDLT where a transaction is part of such arrangements.
• Thus, where such arrangements would lead to avoidance of liability to tax in a sum that is greater than the SDLT payable, it would still be to the taxpayer’s financial advantage to engage in those arrangements, since the taxpayer would have the benefit of the difference between the amount of SDLT and the amount of tax avoided. The practical effect of paragraph 2(4A) itself is thus simply to disincentivize tax avoidance arrangements that will result in a tax saving that is less than the amount of SDLT payable.
• The consequence of this is as follows. If a taxpayer enters into arrangements with the sole purpose of avoiding tax, in the mistaken belief that the arrangements will lead to a tax saving that is significantly greater than the SDLT payable, but in fact the arrangements result in the avoidance of only a minimal amount of tax that is less than the SDLT payable, the taxpayer will lose the benefit of group relief and will be required to pay the SDLT. This will be because the purpose of the arrangements is the avoidance of liability to tax, even if the taxpayer is mistaken about the quantum of tax that will be avoided.
• There is no reason in principle for treating differently a case where a taxpayer has a mistaken belief that the arrangements will lead to a tax saving that is significantly greater than the SDLT payable, but in fact the arrangements do not result in the avoidance of any tax at all. The purpose of the taxpayer in both cases is the same. The difference in the amount of tax avoided in each case (a minimal amount in one case, none in the other) is not such as to justify a difference in treatment between the two cases.
• The Tribunal does not accept the Appellant’s argument that there is necessarily a distinction between the purpose of arrangements, and the reason for choosing particular means for giving effect to that purpose. The Appellant gives the hypothetical example of a businessperson who travels from A to B to attend a business meeting, and who decides to travel by rail by a particular circuitous route in the belief that a discount will be offered on all future rail travel for 12 months if the trip is undertaken by that specific route. The Appellant suggests that in this example, the sole purpose of the journey is to attend the business meeting, and obtaining a discount on future travel is merely the reason for choosing a particular means for achieving this purpose. The Tribunal does not consider this to be a valid analysis for purposes of paragraph 2(4A) Schedule 7 FA 2003.
• In this example, the overall arrangement is not for a trip from A to B, but rather for a trip from A to B via the particular route chosen. The overall arrangement as a whole has two purposes, namely (1) to attend a business meeting in B, and (2) to obtain a discount on future travel. Even if, at the outset, the businessperson is unaware of the possibility of the discount, and is only proposing to travel from A to B by the quickest route, once that person becomes aware of the possibility of the discount and deliberately decides to travel specifically by the more circuitous route in order to obtain this benefit, the specific route becomes part of the overall arrangement, and obtaining the discount becomes one of the purposes of the trip.
• Where there are two ways for a taxpayer to carry out a bona fide commercial transaction, one of which involves tax avoidance and one of which does not, and where the taxpayer chooses the way that involves tax avoidance, then tax avoidance will be at least one of the purposes of adopting that course, whether or not the taxpayer has a subjective motive of avoiding tax (Willoughby at 1079C-D, 1081B-D).
• Paragraph 2(4A) Schedule 7 FA 2003 denies group relief only where the arrangements have the avoidance of liability to tax as a “main” purpose.
• It is clear from this wording that arrangements can have more than one main purpose.
• A purpose will be a “main” purpose if its achievement is one of the primary aims of the arrangements. A purpose can be a “main” purpose, even if it is not as significant a consideration as another main purpose. Thus, if arrangements are driven by two particularly significant aims, A and B, as well as other subsidiary aims, both A and B may both be “main” purposes even if the taxpayer considers A to be more important than B.
• Indeed, purpose B could be a main purpose of the arrangements, even if the arrangements would not have been entered into at all but for the need to achieve purpose A. Even if purpose A is the sole reason for entering into arrangements in the first place, once the decision to enter into the arrangements has been taken, an additional purpose can become an additional main purpose of the arrangements.
• Whether this is the case will be a question of fact, depending on the individual case. The question is whether a purpose is one of the main purposes, not whether it is the most important purpose, and not whether the arrangements would be proceeded with in the absence of any of the other purposes.
• Paragraph 2(4A) Schedule 7 FA 2003 prevents the Appellant from claiming group relief on its acquisition of the Lease from B64.
• As to paragraph 2(4A)(a) Schedule 7 FA 2003, the Tribunal has found that the transfer of the Lease to the Appellant was effected for bona fide commercial reasons, and this was not disputed by HMRC.
• However, as to paragraph 2(4A)(b) Schedule 7 FA 2003, the transfer of the Lease from B64 to the Appellant formed part of arrangements of which one of the main purposes was avoidance of liability to tax. (1) The series of transactions that took place on 5 July 2011 were, collectively, “arrangements” within the meaning of paragraph 2(4A)(b). All of these transactions had been pre-planned as coordinated elements of a single overall scheme, which had been set out in advance in the PwC step plan (paragraphs 50-56, 83(2) above).
• The transfer of the Lease from B64 to the Appellant was one of the steps envisaged in the step plan, and thus formed part of these arrangements for purposes of paragraph 2(4A)(b) Schedule 7 FA 2003.
• One of the purposes of the arrangements, viewed as a whole, was to achieve the envisaged corporation tax advantage. Even if the achievement of this tax advantage may not have been in contemplation at the time that idea of transferring the Tower into an SPV was first raised, once the group became aware of the possibility of achieving this tax advantage it became a major consideration in the arrangements. Given the magnitude of the expected corporation tax advantage, the Tribunal is satisfied that it would have been very important to the Appellant to ensure that the arrangements were implemented correctly to ensure that the tax advantage was in fact realised.
• Detailed planning to this end was undertaken. The PwC step plan went through several iterations, and significant professional fees were incurred for this purpose. In advance of the transactions implementing the arrangements, the necessary legal agreements were negotiated and agreed, and the transactions were executed in a carefully planned sequence, in accordance with the step plan prepared by PwC.
• The Tribunal is satisfied that obtaining the tax advantage became one of the main purposes of the arrangements .
• This purpose amounted to avoidance of liability to tax for purposes of paragraph 2(4A)(b) Schedule 7 FA 2003.
• This was not a case where there were two obvious or standard ways of transferring the Tower from SGSL to the Appellant, and where the Appellant simply chose the way that was least costly in terms of tax.
• Rather, the PwC step plan was a bespoke plan, devised by professional advisers, for an arrangement that would not only reduce or eliminate the tax costs of transferring the Tower from SGSL to the Appellant, but would in fact confer a very substantial positive financial gain on the Appellant. It involved a complicated series of transactions that were the result of a concerted plan. A consideration of the whole of the transactions shows that there was concerted action to an end of the avoidance of tax (paragraph 61 above). Moving the Tower to an SPV, the other main purpose, could have been achieved by far less complicated means. The complicated series of transactions can only have been intended to place the relevant group members outside liability to tax that would otherwise have attached to the group, whether or not the Tower had been transferred from SGSL to another group company. The step plan itself indicated that the intended effect of this series of transactions was to obtain this tax advantage.
• The step plan did not involve taking advantage of any offer of freedom from tax which Parliament has deliberately made.
• Rather, the step plan involved a course of action designed to conflict with or defeat the evident intention of Parliament, by removing from tax liability some £170 million of latent profit that would otherwise have been taxable.
• The fact that ultimately no tax was avoided does not mean that the arrangements cannot have had the purpose of avoiding liability to tax. The Tribunal does not accept the Appellant’s contention that this conclusion means that merely thinking about tax avoidance, without actually avoiding tax, will constitute tax avoidance. The Appellant in this case did not merely think about tax avoidance. The Appellant took professional advice on steps that could be taken to achieve a significant corporation tax advantage, and then entered into a series of legal transactions to implement that advice in practice. It then submitted a corporation tax return reflecting the tax advantage to which it believed that it was entitled. It might well be that the Appellant would ultimately have enjoyed that tax advantage in practice if HMRC had not enquired into the return.
• In the result, denial of group relief by HMRC upheld.
• Words and Phrases: “avoidance of liability to tax”; “Purpose”, “Main”; “Main Purpose”; “Transaction”; “Arrangement”
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