The Commissioners for HMRC v Euromoney Institutional Investor Plc

As noted in Snell, s137(1) contains two limbs. The first limb is concerned with whether the “exchange” that arises in the circumstances of this appeal is effected for “bona fide commercial reasons”. The second limb is concerned with whether that “exchange” forms part of a scheme or arrangements and, if so, whether the main purpose, or one of the main purposes, of that scheme or arrangements is avoidance of liability to capital gains tax or corporation tax.

At the hearing and in its Grounds of Appeal, HMRC contended that the “fundamental error” on the part of the FTT (notwithstanding its express adoption of the approach taken in Snell at [71] of the Decision) was a failure to apply Snell, although this was not developed in its skeleton argument for the hearing.

Snell provides some direct authority on how the first limb of the test should be applied. In that case Mr Snell sold shares in a company for a total consideration of £7,317,000 of which £6,850,000 was to be satisfied by loan stock and was, therefore, an “exchange” for the purposes of s135 of TCGA. At the time of that exchange, Mr Snell had some notion (which, in their findings of fact the Special Commissioners described as a “purpose”) that he might emigrate from the UK. If s135 of TCGA applied to the exchange, and Mr Snell subsequently redeemed his loan stock when he was no longer resident in the UK, he would pay no tax on the gain he realised on redemption of the loan stock. HMRC therefore asserted that s137(1) prevented s135 from applying.

HMRC argued, as regards the first limb of s137(1), that in assessing whether the “exchange” was effected for bona fide commercial purposes, it was relevant to ask why Mr Snell chose to take consideration in the form of loan stock, rather than cash. No doubt HMRC considered there could only be one answer to that question: by taking loan stock rather than cash Mr Snell obtained the ability to “roll over” part of the gain into the loan stock with the prospect of escaping tax on that part altogether if he redeemed the loan stock while resident outside the UK. However, both the Special Commissioners and Sir Andrew Morritt C rejected HMRC’s argument holding that the first limb of s137(1) had to be applied to the actual exchange effected and not some other transaction that Mr Snell could have effected.

At [11] of his judgment in the High Court, Sir Andrew Morritt C noted first that s135 applies to treat a transaction as a “reorganisation” falling within ss127 to 131 of TCGA. None of the wider reorganisation rules made the reason for the reorganisation question relevant to the question of whether rollover treatment was available. He then reasoned, at [12]:

“Sections 135 and 136 apply [the reorganisation provisions in ss127 to 131] to exchanges of securities, whether involving a scheme of reconstruction or amalgamation or not, in which more than two persons are involved. In such circumstances it is obviously necessary for the exchanges to be for commercial reasons if the new and the old holdings are to be treated as the same. But if there is appropriate identity and value commensurate with bona fide commercial reasons I can see no reason why Parliament should have been concerned with whether the same result might have been achieved by some other legal form or means. This is particularly so when the same sub-section introduces a non-avoidance test by reference to the scheme or arrangements as a whole. In my judgment this conclusion is confirmed by the wording of the subsection. The question is whether 'the exchange in question is effected for bona fide commercial reasons'. If the answer is in the affirmative it is irrelevant to consider the reasons why the parties chose to structure their transaction in that way. For these reasons I dismiss the cross-appeal of HM Revenue and Customs.”

The emphasis in the above quotation is ours, added because HMRC submit that this passage is of significance and demonstrates that one of the reasons why the first limb of s137(1) did not ask why Mr Snell chose to take loan stock rather than cash is because this question will inevitably arise when the second limb comes to be considered.

We do not accept that, in the passage we have quoted, Sir Andrew Morritt C was making any determination as to how the scope of any “scheme” or “arrangements” should be determined when applying the second limb of s137(1) in any particular case. In our judgment, that passage simply notes that the first limb and second limb are phrased differently and so concerned with different matters. The first limb is concerned with the reasons for “the exchange” which suggests a focus on the actual transaction the taxpayer effected rather than a different transaction it could have effected. The second limb, by contrast, looks at matters other than the exchange itself, reinforcing the court’s conclusion on the extent of the enquiry under the first limb. Put shortly, the highlighted sentence on which HMRC rely is part of the court’s reasoning as to the interpretation of the first limb, rather than a determination as to the scope of any scheme or arrangements for the purpose of the second. In our judgment, it remains for the FTT to determine the scope of any scheme or arrangements as a question of fact in the light of the evidence in front of it. The only (limited) guidance given in the passage above is that the purpose test in the second limb of s137(1) must be applied by reference to the “scheme or arrangements as a whole”.

We consider that Snell offers relatively little by way of guidance as to how to ascertain the precise scope of any “scheme” or “arrangements” for the purposes of the second limb of s137(1), beyond the observation that “scheme” and “arrangement” should bear their ordinary meanings (see [28] of the judgment, which was expressly followed by the FTT at [76]) and the need, already mentioned, to analyse the “scheme or arrangements as a whole”. Both parties accepted before us that the scheme or arrangements must be considered as a whole, although they advance very different explanations of what that approach entails in the specific circumstances of this appeal. In the circumstances we cannot see how the FTT can be said to have misapplied Snell in its approach to this case. While the FTT spent time dealing with the detailed facts in Snell at [86]-[90], it plainly did so in the context of submissions from HMRC to the effect that the appeal in this case was “on all fours with Snell” (see [91]), concluding, in our judgment correctly, that HMRC was wrong about that.

That Snell provides little guidance on how to determine the extent of any “scheme” or “arrangements” for the purposes of the second limb of s137(1), and is not on all fours with this case, is scarcely surprising given the matters in dispute in Snell. If Mr Snell exchanged shares for loan stock as part of a scheme or arrangement under which he would dispose of the loan stock after emigrating from the UK, the second limb of s137(1) clearly required analysis. The questions in Snell were (i) whether the Special Commissioners’ factual findings supported a conclusion that there was such a scheme or arrangement and (ii) if so whether, having regard to authorities on the concept of “tax avoidance” such as IRC v Willoughby [1997] 1 WLR 1071 the main purpose of such a scheme consisted of “avoiding” a liability to capital gains tax. Snell did not need to, and did not, lay down any detailed test for establishing the constituent elements of any scheme or arrangements.

Furthermore, although the FTT relied on Brebner in light of submissions made to it by Euromoney, we understood it to be accepted by Mr Prosser QC, on behalf of Euromoney, that Brebner was not in fact a helpful authority. In our judgment, it does not offer any guide as to how the second limb of s137(1) should be interpreted or applied. Brebner concerned a completely different statutory provision applying a different test.

In his oral submissions, Mr Ewart set out what HMRC argue to be core propositions applicable to the second limb of s137(1) including:

The proposition set out in paragraph 42(1) is not set out in s137(1) itself and we see no reason why it should be inferred to be Parliament’s intention. The propositions set out in paragraphs 42(2) and 42(3) are at best glosses on the statutory language and, at worst deviations from it. In our judgment, the propositions that Mr Ewart put forward are over-complicated and apt to confuse. There is no substitute for the words of the statute which set out a straightforward test.

We draw the following conclusions on the second limb of s137(1) derived from the limited assistance provided by Snell and the ordinary meaning of the statutory words used:

There is no dispute as to the first limb of s137(1) of TCGA since it is common ground that the exchange was effected for bona fide commercial purposes. HMRC’s Ground 1 relies on the proposition that the FTT made an error of approach which led to it wrongly identifying the appropriate scheme or arrangements for the purposes of the second limb of s137(1).

The proposition that the FTT made an “error of approach” has an unpromising beginning because, as we note in paragraph 44 above, s137(1) does not mandate any particular “approach” beyond that set out on the face of the statutory provision which requires the FTT to address the two factual questions we have set out in paragraph 44. Nevertheless, we will examine with some care the submissions made by HMRC as to the “correct” formulation of the scheme or arrangements and their criticisms of the FTT’s reasoning.

HMRC’s explanation of what it regarded as the “correct” formulation of the scheme or arrangements has evolved over the course of these proceedings.

In paragraph 5 of their Grounds of Appeal to the FTT, HMRC submitted that it is “not a natural reading of s137(1)” to require any scheme or arrangements which are to be tested to include the whole of the “exchange” referred to in that sub-section. Rather, it was enough that the scheme or arrangements “must include, in whole or in part, the exchange referred to in s137(1)”. Accordingly “it is not necessary for every element of the exchange to be an element of the arrangements before one can say, in ordinary English, that the exchange forms part of the arrangements”. In their Grounds of Appeal, HMRC argued that the “easily identifiable set of arrangements” in this case consist of issuing redeemable Preference Shares (in substitution for cash) as part of the exchange, combined with a plan for DTL to redeem those Preference Shares shortly after they qualified for SSE. The “arrangements” on this case, do not include other elements forming part of the overall transaction, such as, for example, the issue of the B ordinary shares.

That formulation suggested that HMRC considered the correct focus to be on the reasons why Euromoney requested Preference Shares in place of cash consideration of approximately $21m. In answer to a question from the Tribunal, Mr Ewart QC initially agreed that HMRC’s argument was that the FTT should have focused on Euromoney’s decision to take Preference Shares rather than cash as a “subset” of the overall transaction (he later put the point slightly differently by reference to a Venn diagram). That, he said, was the scheme or arrangements – all other elements of the transaction did not form part of that scheme or arrangements. We reject that submission. The FTT was not compelled to focus on any particular aspect of the transaction, whether described as a “subset” of another part or identified by reference to hypothetical Venn diagrams. Rather, it was for the FTT to decide, as a question of fact, on the scope of any scheme or arrangements in the particular circumstances of this case.

Before the FTT, as noted at [73], HMRC suggested that the relevant scheme or arrangements consisted of “replacing” the cash consideration of $21m with Preference Shares in the manner highlighted in Mr Flint’s email of 17 October 2014. However, in oral submissions before us, Mr Ewart explained that it was not central to HMRC’s case that prior to Mr Flint’s email there was a commercial understanding that $21m of consideration would be in cash. On HMRC’s case, the analysis would be exactly the same if Euromoney had requested Preference Shares right from the beginning in order to secure the SSE treatment it sought. Mr Flint’s email simply made the existence of the scheme easier to prove.

HMRC’s submissions included some criticisms of [80] of the Decision in which the FTT held that s137(1) required “consideration of the entire exchange”. However, those criticisms did not sit entirely comfortably with the fact that s137(1) itself required the FTT to consider the purpose of any scheme or arrangements of which the “exchange” formed part and the fact that HMRC accepted that the “exchange” for these purposes consisted of the whole exchange of CDL shares for both ordinary shares and Preference Shares.

We did not, therefore, find it entirely straightforward to ascertain precisely what HMRC considered the “correct” approach to be. Nevertheless, despite the various formulations of HMRC’s position, at their heart was a consistent point. HMRC’s objection is that Euromoney took part of its consideration in the form of Preference Shares that could readily be converted into cash after 12 months without any CGT charge arising whereas, had it taken $21m of cash instead, there would have been an immediate CGT charge. However, we do not accept HMRC’s submission that the FTT made any error of principle in failing to confine its analysis of the second limb of s137(1) to the reasons why Euromoney took consideration in the form of Preference Shares rather than cash.

As we have noted in the section above dealing with the interpretation of s137(1), ascertaining the extent of the scheme or arrangements was a question of fact for the FTT. There is nothing obviously irrational with a finding that the scheme or arrangements included both (i) the exchange of CDL shares for a combination of ordinary shares in DTL and Preference Shares (with the ordinary shares in DTL being much the more valuable component of the consideration) and (ii) the subsequent redemption of the Preference Shares for cash at a time when SSE was available.

The FTT did not overlook the fact that Euromoney had requested Preference Shares in place of $21m of the cash consideration precisely because it hoped that the Preference Shares would confer an SSE benefit. It made careful and detailed findings about the circumstances in which Euromoney obtained those Preference Shares. No doubt HMRC would have preferred the FTT to focus its analysis on the arrangements involving the Preference Shares in isolation rather than on the entire exchange. However, the FTT’s decision not to accept HMRC’s submissions in this regard involved no error of “approach” since it was for the FTT to determine, as a factual matter, the nature and extent of any scheme or arrangements of which the exchange formed part. Understood in that light, HMRC’s arguments that the FTT followed an incorrect “approach” simply represent a disagreement with the factual determinations that the FTT made.

HMRC counters that, if it were correct, to focus on the totality of the exchange, the decision in Snell would have been approached very differently as it would have required the commercial purposes of Mr Snell’s transactions (selling shares for consideration) to be weighed against the tax avoidance purpose (the wish to redeem the loan stock when he was no longer UK resident). Yet there is no hint of such an approach in Snell suggesting, argue HMRC, that the focus should be, as in Snell itself, on why Euromoney chose to take Preference Shares as consideration rather than cash.

We reject that submission. The approach in Snell was different because its facts were different. Mr Snell exchanged his shares for a total consideration of £7,317,000 of which £6,580,000 was in loan stock. He chose to defend HMRC’s assessment by contending that (i) he had no settled intention to become non-resident when he received the loan notes and (ii) in any event, redeeming loan notes while resident outside the UK did not amount to “tax avoidance” because the scheme of the UK legislation is such that non-UK residents are not subject to capital gains tax. He chose not to make an argument based on the relative weight of any tax avoidance purpose as compared with purely commercial purposes, but if he had, it would have been considered.

Nor do we accept HMRC’s submission that a focus on the purpose of the totality of an exchange or transaction would be unworkable because it would invite a consideration of the subjective purposes of all persons involved in those transactions. The FTT’s task was simply to make findings on the nature and extent of any scheme or arrangements of which the exchange formed part and the purpose or purposes of that scheme or those arrangements. In this case, the FTT was entitled to conclude that a consideration of Euromoney’s subjective purposes was at the heart of the analysis since the initiative for the creation of the Preference Shares came from Euromoney. In different cases, it may be that a wider examination of the subjective intentions of a wider number of counterparties will be relevant. Since the FTT’s conclusion was essentially factual, it cannot be shown to be incorrect by considering consequences that might follow if that approach were followed in different situations.

As Euromoney conceded at the hearing, the FTT was in error in concluding that Brebner supported its approach to the determination of the extent of the scheme or arrangements since Brebner concerned a completely different statutory provision. However, that error was not material to the outcome since the FTT correctly applied s137(1), even if its reasons for following the approach it did were flawed to the extent they involved placing reliance on Brebner.

We dismiss HMRC’s appeal on Ground 1.

As Ground 2, HMRC argue that even if the FTT correctly identified the scheme or arrangements as embracing the entirety of the arrangements summarised in paragraph 25 above, the FTT erred in law in its determination of the purposes of those arrangements. HMRC do not challenge the FTT’s self-direction at [100] to [101] as to the legal principles that it had to apply in ascertaining the purpose or purposes of the scheme or arrangements. Nor do HMRC challenge the FTT’s finding of fact at [102] that Euromoney’s main subjective purposes were commercial and that tax considerations were not important. The factual finding at [102] may well, as Euromoney argues, of itself prevent HMRC’s Ground 2 from succeeding. However, we will not express a concluded view on that point and will instead focus on the detail of HMRC’s challenge under Ground 2 which is brought under Edwards v Bairstow principles: HMRC argue that, in its evaluation of purpose, the FTT took into account irrelevant considerations, failed to take into account relevant considerations and reached irrational conclusions.

HMRC’s first argument under this ground relates to the FTT’s conclusion at [104] that, while the tax advantage that the Preference Shares delivered was significant in absolute terms at £2.8 million, it represented less than 5% of the sale consideration and so was not significant in relative terms. That, argue HMRC, was an irrelevant consideration since the question is one of subjective purpose and Euromoney’s own witnesses had not considered the tax saving relative to total consideration.

We reject that argument. In oral submissions, HMRC’s counsel before the FTT, Ms Choudhury, had asked the FTT to look beyond what Euromoney’s witnesses said about their own subjective thought processes and take into account other evidence that might cast a light on their intentions. Ms Choudhury had drawn the attention of the FTT to the judgment of the Court of Appeal in Travel Document Service to which we have referred in paragraph 27 above. Having heard those submissions, the FTT made no error of law in turning its mind to the relative size of the tax saving.

Nevertheless, argue HMRC, the apparent analogy that the FTT drew with Travel Document Service as revealed by its quote from that case in the final sentence of [104] was misplaced. Travel Document Service was concerned with whether, despite the evidence of witnesses as to their subjective intentions, tax avoidance must have been a purpose of a loan relationship. Yet in this case, the question before the FTT was whether tax avoidance was a purpose of the scheme or arrangements in question. We reject that submission. Once HMRC had asked the FTT to consider matters other than witnesses’ statements of subjective intention it was for the FTT to decide how much weight to give to relevant factors that it highlighted. The FTT was entitled to conclude that the relatively modest size of the tax advantage viewed in the context of the deal as a whole was relevant. Its conclusion, that this suggested that avoidance of tax was not a “main purpose”, was an evaluative conclusion that was open to it.

HMRC focused next on paragraph [105] in which the FTT held that the fact Euromoney had not identified the “downside” referred to in paragraph 15 suggested that tax avoidance was not a main purpose of the scheme or arrangements as a whole. That, conclusion, argue HMRC, could not properly be drawn. The “downside” was not identified simply because both Euromoney and its advisers overlooked the point which says nothing about the purposes of the scheme or arrangements as a whole.

We reject that submission. It was a matter for the FTT to evaluate the significance or otherwise of Euromoney’s ignorance of the downside. There was evidence before the FTT that Euromoney’s analysis of the tax consequences of the insertion of the Preference Shares into the structure was limited. The flavour of Mr Flint’s evidence recorded at [42] to [46] was that the tax advantage was not very important. There was evidence that the tax advice Mr Flint received from PwC was quite cursory. It was open to the FTT to infer that the downside was not identified because Euromoney did not perform, or ask its advisers to perform, a detailed tax review. The FTT was entitled to conclude that this tended to suggest that Euromoney did not regard the tax advantage as particularly important in the context of the scheme.

Next HMRC criticise the FTT’s findings at [106], arguing that an analysis of the time and expense that Euromoney spent on the Preference Share aspect of the transaction, relative to the overall investment of time, effort and expense in the transaction as a whole, says nothing about the significance of the tax saving. HMRC point to other indications that Euromoney regarded the tax saving as significant, for example the fact that it was prepared to renegotiate the basis of the transaction with Carlyle, described by Mr Fordham in evidence as a “very, very tough team” who would “argue on every single point”. This, however, is simply a disagreement with the FTT’s factual conclusion and an invitation by HMRC to go island-hopping in a sea of evidence (drawing on Lewison LJ’s well-known analogy at [114] of FAGE UK Limited and another v Chobani UK Limited and another [2014] EWCA Civ 5). The FTT was entitled to consider that an analysis of the amount of time and expense Euromoney spent on different components of the overall scheme or arrangements had something to say about its beliefs as to the relative importance of those components. It was for the FTT to evaluate what conclusions should be drawn from that analysis.

We dismiss HMRC’s appeal on Ground 2.

Given our conclusions on HMRC’s Ground 1 and Ground 2, the FTT’s decision stands. In those circumstances, we do not need to consider the points raised by Euromoney’s Respondent’s Notice which would, even if they succeeded, simply lead to the same overall outcome, but for different reasons.