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Own goal for taxpayers in TIS shares buyback case

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In this transactions in securities case, HMRC was able to use the taxpayers’ primary line of argument – that they only entered into the transaction to secure a capital gains tax relief – against them.

8th Jul 2024
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The first tier tribunal (FTT) has found for HMRC in an unusual transactions in securities (TIS) case, in which the taxpayers’ primary line of argument – that they only entered into the transaction to secure a capital gains tax relief – opened the doors for HMRC to argue that a main purpose of the transaction had been to avoid income tax. 

The taxpayers – Hugh Osmond and Matthew Allen – were serial entrepreneurs, having made successive investments for over 30 years with a view to realising capital gains.

In March 2015, Osmond and Allen received consideration of £11m and £9m respectively for share buybacks by the company Xercise2 Limited. The taxpayers and their advisers adopted the view that the consideration represented a return of share capital and so was exempt from capital gains tax (CGT) under the enterprise investment scheme (EIS) disposal relief.

HMRC’s position was that the transactions in securities regime applied to the share buybacks, such that the consideration the taxpayers received was subject to income tax, not CGT. 

In March 2021, HMRC issued counteraction notices and assessments, assessing Osmond to income tax of £3,293,936.37, while Allen was assessed to income tax of £2,749,999.10. Both taxpayers appealed against these assessments [TC09163].

EIS disposal relief

As part of their evidence, the taxpayers confirmed that the sole purpose of the share buybacks was to secure EIS disposal relief. It was not to extract value from the company (the taxpayers did not need the money). Had they been able to secure the relief without undertaking a transaction, they would have done so.

The reason the taxpayers undertook the share buybacks in March 2015 was because they were concerned that EIS disposal relief might be withdrawn if there was a change of government, and so they wished to crystallise the benefits of the relief before an election. In short, the taxpayers posited that the transaction was “a CGT play, not an income tax play”.

Main purpose issue

One of the key issues that the FTT considered was whether the main purpose, or one of the main purposes, of the taxpayers being a party to the share buybacks was to obtain an income tax advantage as defined within section 687 ITA 2007. 

The FTT noted that, based on general principles from the TIS legislation and case law, the question of whether the taxpayers had a main purpose of obtaining an income tax advantage was a pure question of subjective fact. 

In addition, it was a purpose and not a benefit test. In other words, if the transaction had another purpose so that the obtaining of an income tax advantage was not a main purpose, then the motive test was not satisfied (even if an income tax advantage actually arose). However, if one of the main purposes of the transaction was to obtain an income tax advantage, the test was satisfied.

Admitted income tax advantage

HMRC’s primary argument on the main purpose issue was that, as the taxpayers had so unequivocally stated that their purpose of being party to the share buybacks had been to secure EIS disposal relief, it necessarily followed that, as a matter of law, they had a main purpose of obtaining an income tax advantage per the definition within section 687 ITA 2007.

Ultimately, the FTT agreed with this position. It noted that the definition of an income tax advantage per the TIS legislation is, essentially, that the actual amount of income tax payable (in this appeal, zero as the consideration was allegedly subject to CGT) in respect of the consideration is less than the income tax payable if that consideration had been paid by way of a qualifying distribution.

Where a taxpayer obtains EIS disposal relief, then the FTT rationalised that they must be within the definition of an income tax advantage, as the CGT payable (of zero) is necessarily less than the income tax which would have been paid had the consideration been paid as a qualifying distribution. It necessarily followed that if the taxpayer had, as a main purpose, the obtaining of EIS relief, they must necessarily have had, as a main purpose, the obtaining of an income tax advantage.

The FTT was mindful to provide some qualifiers in its decision. Namely, the tribunal stated that it was only able to reach this conclusion because the taxpayers’ reason for undertaking the share buybacks was so clearly to obtain the benefit of EIS disposal relief. Even HMRC admitted that it could only run this line of argument because the taxpayers had been so frank about their motives.

Self-contained regime

Another issue considered by the FTT was whether the assessments were invalid, as they were served outside the four-year time limit set out in section 34 TMA 1970.

The FTT found for HMRC on this point, noting that the TIS regime is a freestanding anti-avoidance regime that contains the essential elements relating to the criteria for liability, charging mechanics and an appeals mechanism. 

As a result, the TIS regime, particularly section 698 ITA 2007, provided HMRC with a power to issue a counteraction notice and a corresponding assessment within the relevant time. Per the legislation at the time of the transaction, this was six years from the end of the relevant tax year. The FTT found there was no further limitation imposed on HMRC by, for example, section 34 TMA 1970, and so HMRC’s assessments were in time.

The appeals were dismissed.

Masterful dodging

As its conclusions did not hang on the point, the FTT rather masterfully dodged technical consideration of one question argued during the appeal, namely whether the Taxes Management Act 1970 is an Income Tax Act. Instead, the tribunal noted that the matter would “no doubt be determinative in another appeal”.

Replies (4)

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By Justin Bryant
08th Jul 2024 13:46

See: https://www.accountingweb.co.uk/any-answers/interesting-tis-case

It was certainly injudicious for the taxpayer to say there were no other good reasons for the transaction (in fact, any old other reason would probably have been OK - as HMRC seemed to accept), although this tax barrister has an interesting take on things (behind a paywall), but he seems to overlook the key (and unusual) point that no other good reason was proffered by the taxpayer here, other than to bank the EIS CGT advantage: https://www.pumptax.com/misunderstanding-purpose-in-osmond-allen/

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By hyper10
10th Jul 2024 11:13

I know nothing of this case but in my time, I have retained 4 Barristers and they all displayed the same trait. They suffered from " this is how I see it" not this is how it is.
They are by and large in my limited experience prima donna's who if questioned by their client are prone to hissy fits.
I got all my fees back from one because the advice was plain wrong, I know this as the advice ( not tax) made no sense, I searched for hours on google for case law and presented it, his response was if I didn't value his opinion, then he didn't want my business but the reality is he had adopted a position and view and then moulded the facts to confirm that view.
They are far from infallible despite the aura they exude.

Thanks (1)
Replying to hyper10:
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By Brend201
10th Jul 2024 22:46

And they have, overall, only a 50% success rate in contested cases.

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By Taxman999
10th Jul 2024 19:15

The crucial point is surely that the question whether the taxpayers had a main purpose of obtaining an income tax advantage is one of fact, not of law. The FTT explicitly found as a matter of fact that they did not have such a purpose (see para 55 of the judgment). I therefore find it difficult to see how the FTT's decision that the TiS rules applied can possibly be correct. Unless, of course, their finding of fact as to the purpose can be impugned on the grounds that it is unsupported by the primary facts - which is possible but seems unlikely.

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