The Commissioners for HMRC v Burlington Loan Management DAC

The Respondent company (“BLM”) is resident in Ireland for the purposes of the UK-Republic of Ireland double taxation convention (“the UK-Ireland treaty” or “the treaty”). In 2018 it took an assignment (the “Assignment”) of a debt claim (the “SAAD Claim”) from SAAD Investments Company Limited (“SICL”), a company resident in the Cayman Islands. As a result of the Assignment, BLM became entitled to receive payments of yearly interest in the administration of Lehman Brothers International (Europe) (“LBIE”), which was a company resident in the United Kingdom.

As a result of ss. 368(2) and 369 of the Income Tax (Trading and Other Income) Act 2005, interest with a source in the United Kingdom is subject to income tax in the hands of a non-UK resident company. It was not in dispute that the interest in respect of the SAAD Claim had a UK source. A UK resident person (such as LBIE) paying yearly interest to a non-UK resident is subject to an obligation under s.874 of the Income Tax Act 2007 (“ITA 2007”) to deduct an amount representing income tax on the interest at the basic rate of income tax (which was 20% at the relevant time). The income tax deducted then discharges in full the liability of the non-UK resident company to income tax on the interest: see ss.815, 816(1)(a) and 825(2)(a) of that Act. We refer to the amount withheld from the interest as “UK WHT”.

The UK’s domestic taxing provisions have effect subject to any applicable double tax convention which has been incorporated into UK law under s.2 of the Taxation (International and Other Provisions) Act 2010 (“TIOPA”). If the UK is a party to a convention that allocates sole taxing rights to the other contracting party in respect of particular income, the effect of s.6 of TIOPA is that the domestic tax provisions charging the income to UK tax have no effect.

Article 10 of the UK-Cayman Islands double tax convention provides that “items of income not dealt with in the foregoing Paragraphs of this Arrangement arising in a Territory and paid to a resident of the other Territory may be taxed in the first-mentioned Territory.” As interest is not dealt with in the preceding provisions of the treaty, the UK’s domestic tax provisions described above apply. Relief from double taxation is afforded by Article 11 of that treaty: the Cayman Islands would give a credit for the UK tax against any Cayman Islands tax chargeable in respect of the same interest.

Consequently, if SICL had retained the SAAD Claim, the interest payable by LBIE in respect of that claim would have been subject to an obligation to deduct an amount representing income tax at a rate of 20%. The tax deducted would have satisfied SICL’s liability to UK income tax. Any relief for double taxation available under the law of the Cayman Islands (as a credit against UK tax) would have eliminated any double taxation but, economically, SICL would have been subject to a tax cost of at least 20% of the interest.

By contrast, Article 12(1) of the UK-Ireland treaty provides that interest derived and beneficially owned by a resident of a Contracting State is taxable only in that State. Once the SAAD Claim was assigned to BLM, it was beneficially owned by it and, as an Irish resident, it follows that, if Article 12(1) of the treaty applied, the interest in respect of the SAAD Claim was taxable only in Ireland. In that case, s.6 of TIOPA would have applied and the UK domestic taxing provisions would not have been engaged.

However, the application of Article 12 was subject to an anti-abuse measure (Article 12(5)). If Article 12(5) applied (so that Article 12(1) did not), both the UK and Ireland retained their taxing rights in respect of the SAAD Claim interest. The interest would then be taxable in the UK as described above and would also be subject to Irish corporation tax so far as it comprised part of the Irish company’s taxable income. Under Article 21(1)(a) and (3) of the UK-Ireland treaty any UK income tax would be allowed as a credit against any Irish tax computed by reference to the same income.

At the relevant time, trading income was subject in Ireland to a corporation tax rate of 12.5% while a higher rate of 25% applied to income from an excepted trade (as defined in Part 2 of the Taxes Consolidation Act 1997) and to non-trading income (for example, rental and investment income). There was no evidence before the FTT as to how the SAAD Claim interest was actually taxed in Ireland in the hands of BLM. But it is clear that, as with the case of the application of the UK-Cayman Islands treaty to SICL, BLM would be subject to an absolute cost of at least 20% of the interest if Article 12(1) of the UK-Ireland treaty did not apply.

In its decision (the “Decision”) reported at Burlington Loan Management DAC v HMRC [2022] UKFTT 290 TC, the First-tier Tribunal (Tax Chamber) (the “FTT”) concluded that the Assignment did not engage Article 12(5) of the UK-Ireland treaty. The question raised in this appeal is whether we should interfere with that conclusion. References to numbers in square brackets are to paragraphs of the Decision unless the context indicates otherwise.

The FTT quoted Article 12 of the UK-Ireland treaty in full at [72] of the Decision the material parts of which are:

The original treaty having been amended in 1998, those were the provisions of the UK-Ireland treaty in force at the material time. Before that amendment, Article 12(5) contained an exception for “bona fide commercial” transactions and read as follows:

It was common ground that the process by which SICL transferred the SAAD Claim to BLM involved an “assignment of the debt-claim in respect of which the interest is paid” so that Article 12(5) was capable of application. The central question before the FTT was whether the main purpose, or one of the main purposes, of any person concerned with that assignment was to take advantage of Article 12(1) of the treaty by means of that assignment.

Before the FTT, there was some debate as to the proper approach to the construction of Article 12(5). However, the following conclusions of the FTT are now common ground:

Two aspects of the FTT’s construction of Article 12(5) are disputed:

None of the findings of primary fact summarised in this section are challenged.

LBIE went into administration on 15 September 2008. A secondary market emerged in claims where a creditor had a “proved claim” entitling them to some payment as part of the administration ([18] to [20]). That secondary market included an auction process established by LBIE’s administrators under which eligible creditors with claims having a value of less than £10 million could auction those claims to the highest bidder.

Unusually for an administration, LBIE’s administrators were able to realise what the FTT termed the “Surplus” because LBIE’s assets exceeded its proved claims. The Insolvency (England and Wales) Rules 2016 entitled holders of proved claims to interest (“Post-Administration Interest”). That led to the question whether s. 874 of ITA 2007 applied so that the Post-Administration Interest was payable under deduction of UK income tax by LBIE at the rate of 20%. By December 2017, the state of the law was as set out in a judgment of the Court of Appeal to the effect that the Post-Administration Interest was yearly interest, overturning the decision of Hildyard J in the High Court. However, there was an appeal to the Supreme Court which gave its judgment in 2019, after the Assignment had taken place.

BLM is a substantial investment company. Its investment manager was Davidson Kempner Capital Management, a New York based asset manager. As at the date of its 2017 financial statements, BLM held (directly or indirectly) about $6.9 billion of assets ([14] and [15]). It started acquiring proved claims in the LBIE administration in 2011 and came to own 443 such claims ([30] to [33]). BLM purchased some claims (including the SAAD Claim) after the vendors had received the principal amount. In such cases, BLM was purchasing the right to future payments which might arise such as the Post-Administration Interest.

SICL, the former owner of the SAAD Claim, had received the principal amount of the SAAD Claim on 7 September 2016. In February 2018, SICL, which was then in liquidation, instructed a third-party broker (“Jefferies”) to market the SAAD Claim. BLM was the successful bidder.

The commercial terms of the transaction were agreed on 8 February 2018. Those commercial terms were set out in a written contract dated 12 February 2018 (referred to in that contract as the “Trade Date”). Completion took place in two stages on 9 March 2018. At the first stage, the liquidators of SICL assigned the SAAD Claim to Jefferies for a consideration of £82,400,000. At the second stage, Jefferies assigned the SAAD Claim to BLM for a consideration of £83,550,000. Once SICL transferred the SAAD Claim to Jefferies, it was preordained that Jefferies would assign it to BLM ([165(7)].

On 25 July 2018, the gross amount of the Post-Administration Interest payable in respect of the SAAD Claim was £90,736,521.36. LBIE’s administrators paid 80% of this sum to BLM (£72,589,217.09) in cash on that date. They withheld 20% of the Post-Administration Interest (£18,147,304.27) under s.874 of ITA 2007 and paid it over to HMRC in September 2018 ([6]).

The economic effect of these transactions can be summarised as follows:

The Assignment also operated to insulate SICL from risks it would have suffered if it had continued to hold the SAAD Claim and transferred those risks to BLM. The risks in question were:

The Assignment also meant that SICL no longer needed to consider the “withholding tax risk” – namely, the residual uncertainty as to whether Post-Administration Interest was subject to UK withholding tax at all (see paragraph 17 above). If the Supreme Court decided that the Post-Administration Interest was not subject to UK WHT, SICL might well consider that, with hindsight, it had sold the SAAD Claim too cheaply. However, it had no ongoing exposure to UK WHT on the Post-Administration Interest and, for its part, BLM thought that the incidence of UK WHT was not a risk at all since it expected to be able to reclaim any UK WHT by virtue of Article 12(1) of the treaty.

The FTT made the following findings as to the state of BLM’s knowledge:

The FTT’s reasoning at [164(4)] also made it clear that BLM realised that, even though SICL could only expect to retain 80% of the Post-Administration Interest if it did not sell the SAAD Claim, BLM nevertheless needed to offer a price that was more than 80% of that interest. That was because of the presence of other potential purchasers who would not be subject to the withholding tax and so could offer more than 80%: for example, companies benefiting from other treaties, UK resident companies with losses to offset against the income or exempt investors such as pension funds. It follows from this that the FTT’s finding was that BLM determined its bid by assuming that SICL would transfer the SAAD Claim to someone for whom UK WHT would not be an absolute cost. Accordingly, BLM needed to pitch its offer attractively so that SICL did not ask Jefferies to market the SAAD Claim more widely.

A further consequence of the FTT’s finding is that BLM would have realised that it could only make a profit on the transaction if it obtained the benefit of Article 12(1) of the UK-Ireland treaty.

The FTT made the following findings as to the state of SICL’s knowledge:

At [169], the FTT noted that, as there were two relevant parties (SICL and BLM), each could have had a main purpose of “taking advantage” of Article 12(1) of the treaty either for itself or by enabling its counterparty to do so. That meant that there were four permutations which the FTT addressed as Questions 1 to 4 at [173] to [203]. The focus of argument before us was on how the FTT had dealt with Questions 1 and 3. HMRC confirmed at the hearing that it was not, and never had been, part of their case that Questions 2 and 4 were applicable (either party having a main purpose of enabling the other to take advantage of the treaty).

The FTT dealt with Question 1 (whether BLM had a main purpose of “taking advantage” of Article 12(1) for itself) at [173] to [181].

At [174] and [175], the FTT said that it was necessary to distinguish a person’s “purpose” for doing something from that person’s understanding of the consequences of doing it. It characterised BLM’s awareness that Article 12(1) would entitle it to receive Post-Administration Interest free of UK WHT as part of the “setting” in which BLM made its offer to acquire the SAAD Claim rather than an independent “purpose” of that acquisition.

At [176], the FTT reasoned as follows:

At [177] to [180], the FTT considered what it was that HMRC found objectionable about BLM’s acquisition of the SAAD Claim in circumstances where they had not sought to invoke Article 12(5) in connection with BLM’s previous acquisitions of interest-bearing claims against LBIE. The FTT believed that HMRC attached significance to the fact that BLM had paid a purchase price of 92% of the amount of the Post-Administration Interest. The FTT understood HMRC’s submission that this “nicely split” the difference between the 80% figure that SICL could expect after UK WHT and the 100% figure that BLM could expect following successful reliance on Article 12(1) with some “juice for Jefferies as the middle-man in between them”.

At [179], the FTT set out its understanding that, if BLM had acquired the SAAD Claim for 80% of the amount of Post-Administration Interest rather than 92%, HMRC would not have alleged that BLM had a main purpose of “taking advantage” of Article 12(1). The FTT asked why, if that was right, the position should be any different simply because BLM agreed to pay a higher price.

Next, at [180], the FTT compared what it saw as HMRC’s attitude to previous LBIE claims that BLM had purchased with their approach to the purchase of the SAAD Claim. It said that HMRC had “quite rightly accepted” that when it purchased those previous LBIE claims, BLM did not have a main purpose of “taking advantage” of Article 12(1). The FTT concluded that, having done so, HMRC “must logically accept that the same holds true when it comes to determining BLM’s main purposes in acquiring the SAAD Claim”.

The FTT’s conclusion was, accordingly, that BLM did not have a main purpose of taking advantage of Article 12(1) for itself.

The FTT’s analysis of Question 3, namely whether SICL had a main purpose of “taking advantage” of Article 12(1) itself, was at [186] to [201]. At [192], the FTT noted (i) its conclusion that SICL’s only purpose in entering into the transaction was to sell the SAAD Claim for the best available price; (ii) on 8 February 2018, when the commercial terms were agreed, SICL knew only that the purchaser had some kind of entitlement to a withholding tax exemption but did not know that it was relying on Article 12(1) of the UK-Ireland treaty; and (iii) on 12 February 2018 (the Trade Date), SICL knew that the purchaser was BLM and would be relying on Article 12(1) of the treaty. The FTT considered whether these three propositions were sufficient to make “taking advantage” of Article 12(1) one of SICL’s main purposes in entering into the Assignment.

At [193], the FTT said that, if it did, this would be a “somewhat surprising conclusion” because:

The FTT concluded that this could not be the correct effect of Article 12(5). At [195], the FTT said that such an interpretation would have an “enormous impact on the secondary debt market”. At [196] to [200], the FTT explained, by reference to a report from the OECD Committee on Fiscal Affairs entitled “Double Taxation Conventions and the Use of Conduit Companies” (“the Conduit Report”) why the Assignment was conceptually different from cases of “treaty shopping” dealt with in that report since, following the Assignment, SICL retained no ongoing economic interest in the SAAD Claim, having sold it outright. That introduced the FTT’s conclusion at [201] underpinning its determination that SICL did not have a main purpose of taking advantage of Article 12(1) for itself:

The FTT gave HMRC permission to appeal. Although HMRC’s Grounds of Appeal were not numbered in this way, we find it helpful to divide our analysis of HMRC’s appeal into the following grounds:

Ground 1 involves pure propositions of law. HMRC accept that Grounds 2 to 5 are challenges to evaluative factual conclusions that the FTT reached and that a high hurdle must be overcome for such a challenge to succeed.

By its Respondent’s Notice, BLM seeks to revive the argument summarised in paragraph 14(1) above rejected by the FTT.

The approach to the interpretation of the UK-Ireland treaty was common ground between the parties. The FTT noted at [83] that the principles enumerated in cases such as Smallwood v The Commissioners for Her Majesty’s Revenue and Customs [2010] STC 2045 per Patten LJ at [26] to [29], The Commissioners for Her Majesty’s Revenue and Customs v Anson [2015] STC 1777 per Lord Reed at [54] to [56] and [110] and [111] and Fowler v The Commissioners for Her Majesty’s Revenue and Customs [2020] STC 1476 at [16] to [19] made it clear that:

It was also common ground (see [111]) that, even where they post-dated Article 12(5) of the UK-Ireland treaty, OECD and UN materials could be taken into account in interpreting the treaty: see, for example, Robert Walker J in Memec plc v Inland Revenue Commissioners [1996] STC 1336 at 1349d.

Unlike the FTT (reflecting the submissions of the parties) who started with the ordinary meaning of the words used in Article 12(5) of the UK-Ireland treaty, we start our analysis by considering the object and purpose of the treaty having regard to the relevant OECD and other materials. That, of course, is not a substitute for considering the text of the provision or the various textual points that the parties make on it. However, it will enable us to put the text in context.

In this connection, we are reminded of the comments of Lady Rose in the Supreme Court in Cornerstone Telecommunications Infrastructure Ltd v Compton Beauchamp Estates Ltd [2022] UKSC 18 at [102] to [107] where she deprecated the approach of starting with dictionary definitions before considering the context and purpose of the statutory scheme, noting that this accorded with an earlier judgment of the Supreme Court in Bloomsbury International Ltd v Department for Environment, Food and Rural Affairs [2011] 1 WLR 1546 where Lord Mance had said this at [10]:

A provision similar to Article 12(5) of the UK-Ireland treaty is not included in the OECD model convention. But the commentary on the OECD model convention (the 2015 version – which was the one in force at the material time) does contain material that, in our view, should be taken into account in determining the object and purpose of Article 12(5) of the UK-Ireland treaty.

In the commentary on Article 1 of the OECD model convention, paragraphs 7 to 26 contain material under the heading “Improper use of the Convention”. The commentary notes that:

The commentary then goes on to observe that where specific avoidance techniques have been identified or are especially problematic, it will often be useful to include provision directly addressing the concern. At paragraph 11, the commentary refers to a particularly prevalent form of “improper” use of the OECD model convention discussed in the Conduit Report. It notes that there has been a “growing tendency towards the use of conduit companies to obtain treaty benefits not intended by the Contracting States” and how “this has led to an increasing number of member countries to implement treaty provisions (both general and specific) to counter abuse”. The commentary then discusses a wide number of examples of possible solutions open to member countries to deal with particular cases. Among the examples set out at paragraph 21.4 under the heading “Anti-abuse rules dealing with source taxation of specific types of income” is a form of provision that is, in all material respects, the same as Article 12(5) of the UK-Ireland treaty.

Paragraph 5 of the Conduit Report sets out four different examples of abuse. The first example describes how a person who is a resident of a non-treaty State (State X) beneficially owns interest which arises in another State (State B), which has a treaty with State A. The resident of State X sets up a company in State A and transfers the bond to the company. Interest is paid to the company free of withholding tax as a result of the treaty between State A and State B. The company is subject to no or very low tax in State A. The interest received by the company is then transferred to a resident of State X as a loan.

As noted in paragraph 6 of the Conduit Report, the conduit company “takes advantage” of the treaty provisions but the economic benefit goes to a person (resident in State X) not entitled to use the treaty. The problem is created exclusively by the treaty itself: the domestic tax laws of the source country (in which the advantage arises) are adequate as the State generally taxes all non-residents (including the conduit company). Paragraph 7 of the Conduit Report explains why this is unsatisfactory:

In our view, the UN report on the model double taxation convention between developed and developing countries is consistent with the commentary on the OECD model convention and the Conduit Report but adds little to the detailed commentary that we have set out above.

BLM relied upon some non-statutory Parliamentary materials. There was a dispute as to whether those materials were admissible. We express no view on that issue and nothing that follows should be taken as suggesting that we consider that the materials are admissible. Nevertheless, we have considered the materials to which BLM referred, concluding that they do not take the analysis any further.

On 2 December 1998, in the Standing Committee debate on the 1998 Order (which, among other things, altered the UK-Ireland treaty to include Article 12(5) in its present form), Ms Dawn Primarolo (the then Financial Secretary to the Treasury (“the FST”)) noted in her opening statement that:

The first sentence says nothing more than is said in a number of places in the commentary on the OECD model convention. The second sentence is couched in terms of an example (“such an arrangement could”) and mentions the paradigm example of a conduit company in the same manner as the OECD materials.

The FST concluded the debate by answering a question posed by the Opposition spokesman (Mr Nick Gibb) as to the intention in changing the wording of Article 12(5) of the treaty. She responded to this query at the very end of the debate in this way:

That simply indicates that Article 12(5) is an anti-abuse measure. The reference to preventing “artificial arrangements” is in our view just a different way of saying what the FST said at the beginning of the debate.

In the light of the OECD materials, the parties were rightly agreed that Article 12(5) of the UK-Ireland treaty is in the nature of an “anti-abuse” provision. Indeed, as noted above, the relevant commentary in the Conduit Report (at paragraph 6) actually uses the language of “takes advantage of” in circumstances where it is plain that abuse or unintended benefits of a treaty are in contemplation. The question raised by both BLM’s Respondent’s Notice and HMRC’s Ground 1 is what type of “abuse” Article 12(5) seeks to counteract.

The OECD materials referred to above make it clear that the artificial use of a conduit company is a prime example of the improper use of the UK-Ireland treaty at which Article 12(5) is targeted. However, even on a purposive interpretation of Article 12(5), that article cannot be interpreted as confined to cases which involve only “artificial” steps or arrangements. Article 12(5) makes no reference to concepts such as “artificiality”. If the contracting States had intended to catch only those matters, they could very easily have made express provision in those terms. Indeed, as HMRC submitted, the previous version of the UK-Ireland treaty with its exclusion for bona fide commercial arrangements served to limit the nature of the arrangements to which Article 12(5) applied. The absence of a similar exclusion in the revised treaty reinforces our conclusion.

Accordingly, we reject BLM’s Respondent’s Notice that the FTT erred in failing to limit the application of Article 12(5) to the creation or assignment of debt claims involving only “artificial” steps or arrangements.

We consider that the core purpose of Article 12 of the UK-Ireland treaty is simply to determine which of the two treaty States (the UK and Ireland) should have taxing rights over interest with a source in one of the States where it is beneficially owned by a resident of the other. The UK-Ireland treaty has expressly provided that, as between the UK and Ireland, unless Article 12(5) applies, it is the residence State alone that has taxing rights in relation to interest arising in the source State so long as the person in the residence State beneficially owns the interest. HMRC submitted before us that the purpose of Article 12(1) of the UK-Ireland treaty is to facilitate and encourage lending between the UK and Ireland by seeking to eliminate the risk of double taxation on such loans. We are prepared to accept that this is a purpose of Article 12, but do not consider that it is the only purpose. In any event, this appeal concerns the means by which the contracting States have sought to achieve the overall objective of Article 12. They have done so by giving the residence State the sole taxing rights over interest unless Article 12(5) applies.

The situation provided for in the UK-Ireland treaty can be contrasted with that provided for in the UK’s treaty with the Cayman Island where, as explained above, there is no equivalent provision to Article 12 of the UK-Ireland treaty. The UK-Cayman Islands treaty does not allocate taxing rights as between the UK and Cayman Islands. Relief from double taxation is instead afforded by Article 11 of that treaty: the Cayman Islands would credit the UK tax paid against any Cayman Island tax.

If Article 12(5) of the UK-Ireland treaty is applicable in relation to the Assignment, the position would be, in substance, as it is under the UK-Cayman Islands treaty: the UK’s domestic taxing rights would apply and any double taxation of the interest would be relieved through the application of Article 21 of the UK-Ireland treaty.

In determining whether there has been abuse of the UK-Ireland treaty in the case of the assignment of the SAAD Claim, the question has to be answered by reference to both contracting States. It is, as BLM submits, wrong in principle to answer the question as if Article 12 proceeds from a starting point that interest on the SAAD Claim “should” be subject to UK WHT since that was the pre-existing position while SICL held it. Article 12(5) is not to be read as if it were a provision contained in a UK statute (concerned only with UK taxation) and as providing for a UK tax advantage to be eliminated if a party had a main purpose of avoiding UK taxation.

In our view, the correct starting point is the proposition that, unless there is an abusive arrangement falling within Article 12(5), BLM, a resident of Ireland and beneficial owner of the SAAD Claim, is to be taxed only in Ireland on the Post-Administration Interest. The question, therefore, is whether there is something abusive, in the particular circumstances of this case, for Ireland alone to tax interest beneficially owned by a company resident in its territory.

We now turn to HMRC’s specific criticism of the FTT’s self-direction as to the meaning of Article 12(5) in considering whether SICL (as the seller of the SAAD Claim) had a main purpose of taking advantage of Article 12(1) of the treaty. HMRC’s interpretation of Article 12(5) was put in these terms in their skeleton argument:

We accept that a tribunal of fact considering Article 12(5) may well consider it relevant to determine the extent of a person’s knowledge of the treaty, including whether a party has taken steps to disguise their knowledge or avoid obtaining specific knowledge of its provisions. But those matters would simply form part of the factual enquiry to determine whether a person concerned in the creation or assignment of a debt claim has a main purpose of improperly taking advantage of the Article 12(1) of the UK-Ireland treaty. We respectfully consider that the FTT went too far in saying, at [150], that a necessary condition for Article 12(5) to apply was that SICL knew that the purchaser of the SAAD Claim would be relying on Article 12(1) specifically. We consider that to be an unjustified gloss on the actual words chosen by the contracting States in concluding the treaty.

However, we cannot accept HMRC’s submission either. Their submission seeks always to apply Article 12(5) of the UK-Ireland treaty in a case where the person assigning the interest on a debt claim (in this case, SICL) knew that the purchaser would not suffer UK WHT and consequently sought to obtain an economic advantage for itself by sharing in the saving of UK WHT in circumstances where the purchaser had an exemption from UK WHT. The only thing that mattered was that the exemption was actually attributable to the UK-Ireland treaty even if the seller did not know the basis of the purchaser’s exemption.

In our view, it is a question for the FTT to determine the subjective purposes of both the seller and the purchaser and, in so doing, to consider all the circumstances of the case. But the question before the FTT is, as we have explained above, directed at determining whether there has, by means of the particular transaction concerned, been an abuse of the UK-Ireland treaty.

HMRC’s submission, although expressed as a purposive construction of Article 12(5), in effect turns the provision into something fundamentally different: the provision would be read as if it were directed at the avoidance of UK WHT by the seller and was applicable whether or not the seller actually knew the basis on which the purchaser did not suffer a UK tax charge. In our judgment, even read purposively, that is not what Article 12(5) says. Nor do we consider that HMRC’s submission is consistent with the purpose and object of Article 12 of the UK-Ireland treaty as we have explained it.

Under these grounds HMRC do not challenge any of the primary findings of fact by the FTT. Rather, HMRC are challenging the way in which the FTT went about the evaluative exercise required to determine, as a subjective matter, the purpose of BLM and SICL in entering into the Assignment.

It is important to be clear therefore as to the circumstances in which evaluative judgments may be interfered with by appellate courts. The Supreme Court has recently set out in Lifestyle Equities CV and another v Amazon UK Services Ltd and others [2024] UKSC 8 the appropriate guidance which we consider should be set out in full:

As is clear from [49] of its judgment, the Supreme Court expressly affirmed the conclusions reached by the Court of Appeal in In re Sprintroom Ltd. That case has in fact previously been relied on by the Court of Appeal in two recent tax appeals: see Cheshire Cavity Storage 1 Ltd v Revenue and Customs Comrs [2022] EWCA Civ 305 at [85] and Urenco Chemplants Ltd and another v Revenue and Customs Commissioners [2022] EWCA Civ 1587 at [78].

Under this Ground HMRC submitted that the FTT failed to take account of the fact that the sole (and, in any event, a main) economic basis for the actual transaction entered into was, as they put it in their skeleton argument, “the UK WHT arbitrage resulting from BLM’s reliance on Article 12(1)”. Accordingly, the FTT was wrong to have concluded that BLM’s ability to rely on Article 12(1) was, as per [174], “merely part of the scenery – the “setting” in which BLM made its offer for the SAAD Claim”. Rather, the 20% difference in value of the SAAD Claim in the hands of SICL and BLM provided the fundamental economic basis for the Assignment. HMRC argue that avoiding the liquidation lacuna and late termination risks could not provide any non-tax rationale for the Assignment. The Assignment did not remove either risk: it just changed the party who was subject to the risks. In any event, the liquidation lacuna risk was not factored into the pricing model adopted by BLM and the contingency giving rise to the late termination risk was considered by BLM to be highly likely not to occur.

In HMRC’s submission, the pricing of the transaction clearly demonstrated the sharing of the UK WHT among the parties. The failure of the FTT to understand the economic basis for the Assignment led it to focus, wrongly, on the existence of a market price for the SAAD Claim in a hypothetical market. It should have focused instead on the actual transaction and, if it had done so, it would have been bound to have concluded that UK WHT was the sole (or, in any event, main) reason for the Assignment taking place. By the time of the Trade Date (when the Assignment was entered into) both BLM and SICL knew about their own and their counterparty’s positions in relation to UK WHT. Any commerciality in the actual transaction derived wholly from the fact that there had been UK WHT avoidance. The economic effect of the transaction was similar to a conduit arrangement: interest was being routed from the UK into the Cayman Islands via Ireland and escaping UK tax.

HMRC argued that the case was similar to that of Fisher v HMRC [2021] STC 2072 (a case dealing with the application of the UK’s anti-avoidance provisions involving the transfer of assets abroad) where the Court of Appeal had found that the transaction concerned was intended to avoid betting duty with a view to securing that the company survived: the survival of the company was clearly a non-tax purpose but it could not be dissociated from the means taken to achieve that purpose. Accordingly, the transaction had a main purpose of avoiding tax. The same analysis, in HMRC’s view, applied here. Obviously, a commercial company entered into the transaction to make a profit but the transaction was entered into only because of UK WHT. Once that was properly taken into account, it followed that the Assignment was a clear abuse of Article 12(1) of the UK-Ireland treaty.

The argument that the FTT failed to “take into account” the existence of the “arbitrage” runs into the difficulty that, throughout the Decision, the FTT showed a clear awareness of the economic effect to which HMRC refer: see for example [177]. HMRC seek to escape from this difficulty by arguing that, even if the FTT was aware of the arbitrage, it failed to feature sufficiently prominently in its reasoning and so undermined the “cogency” of its evaluative conclusion. However, for reasons that we explain, in our judgment that simply represents a disagreement with the FTT’s evaluative conclusion and does not establish an error of law.

It was, in our view, appropriate for the FTT to have had regard to the fact that there were potential purchasers of the SAAD Claim for whom UK WHT would not have been an issue and for whom the UK-Ireland treaty would not have been relevant. The existence of other potential purchasers with different tax attributes who were prepared to pay a price higher than 80% of the interest on the SAAD Claim for reasons wholly unconnected to the UK-Ireland treaty was plainly of relevance to both SICL and BLM. The weight to be given to that factor was a matter for the FTT.

In determining whether SICL had a main purpose of improperly taking advantage of the UK-Ireland treaty, the fact that both SICL and BLM were transacting at arm’s length with a view to getting the best price was, in our judgment, relevant to the assessment of the purpose that SICL had in entering into the Assignment. The weight to be given to that factor was for the FTT to determine. We do not accept that the FTT proceeded on the basis that the fact the SAAD Claim was sold by way of an arm’s length price was a complete answer to the application of Article 12(5). The FTT conducted a thorough assessment of all the circumstances leading up to the Assignment and, if it had considered that an arm’s length deal was in itself enough to secure that Article 12(5) did not apply, its judgment would have been very differently structured and would have been considerably shorter.

Nor do we consider that the Court of Appeal’s judgment in Fisher is of any assistance in the determination of this appeal. It was accepted by both parties that the decision was not binding on this Tribunal because the Court of Appeal’s decision had been subsequently reversed by the Supreme Court on different grounds. Nonetheless, the Court of Appeal’s reasoning could be regarded as persuasive.

Fisher concerned a provision of UK statute law in a very different context; and the relevant statutory provisions were explicitly concerned with the question of whether particular transaction concerned had been entered into with a view to avoiding UK tax. As we have explained above, the case before us is a different one: namely, whether BLM, an Irish resident company, has abusively taken advantage of the UK-Ireland treaty. In our view, HMRC’s reliance on Fisher demonstrates the fallacy of their case. They are starting from the premise that, if UK WHT is being avoided, that alone is sufficient to constitute an abuse of the UK-Ireland treaty so long as the mechanism for the avoidance of the UK WHT was the treaty. But, as we have explained above in our discussion of Ground 1, that is the wrong premise and, accordingly, the presence of any UK WHT arbitrage does not conclusively mean that Article 12(5) is satisfied.

Implicit in HMRC’s Ground 2 is the proposition that, if the FTT had focused properly on the “arbitrage” that HMRC considered to form the entire rationale for the Assignment, they would necessarily have concluded that either SICL’s or BLM’s purpose was to “take advantage” of Article 12 of the treaty. However, in our judgment, Article 12(5) did not just invite an analysis of the economic effect of the arrangements (although, of course, that economic effect was an indicator of purpose). The FTT was right to focus on the question raised by Article 12(5), namely whether SICL’s or BLM’s subjective purpose in entering into the Assignment constituted an abuse of the UK-Ireland. There were a number of indications of those purposes. A flaw in HMRC’s Ground 2 is that it seeks to treat the averred existence of “arbitrage” as decisive on its own rather than as an element for the FTT to weigh in the balance.

Accordingly, we dismiss Ground 2 of HMRC’s appeal.

HMRC also submitted that there are specific errors of law concerning the way in which the FTT determined BLM’s purpose in entering into the Assignment.

First, HMRC say that the FTT was wrong to conclude at [176] that its finding that the “sole” purpose of BLM in acquiring the SAAD Claim was to realise a profit was an answer to HMRC’s case. The FTT failed to recognise that the profit was entirely dependent on BLM taking advantage of the treaty. There was no separate commercial purpose.

This seems to us to be just another way of making the points relied on by HMRC under Ground 2. It was evident that the FTT knew that the only way in which BLM could make a profit was if Article 12(1) applied. The FTT’s evaluative judgment was that Article 12(1) of the treaty was the setting in which the Assignment took place. BLM was not seeking to abuse the UK-Ireland treaty. On the contrary, it expected that, as the beneficial owner of the interest, the treaty would apply to it in the normal way so that the interest fell to be taxed in Ireland rather than the UK.

Second, HMRC say that the FTT at [177(2)] misunderstood the reason why HMRC was seeking to rely on Article 12(5):

HMRC say that they were not concerned with the “significance” or otherwise of the spread. However, we do not consider that [177(2)] shows any misunderstanding. The Decision, read as a whole, shows that the FTT clearly understood HMRC’s case. In [177(2)], the FTT was simply recognising that SICL was sharing in the saving of UK WHT.

HMRC also say that the FTT wrongly inferred at [179] that HMRC would not have sought to apply Article 12(5) if BLM had acquired the SAAD Claim for 80% of the interest rather than 92%:

HMRC say that they would have challenged such a case as much as the actual transaction. In their view, the only difference would have been the amounts of income (and profits) realised by BLM and SICL. In the assumed case, BLM would simply have obtained all of the UK WHT saving.

In our view, the FTT was at [179] simply making the point that, in a case in which BLM acquired the SAAD Claim for no more than 80% of the interest, it could be assumed that SICL was not concerned with UK WHT and that there would therefore be no sharing of UK WHT between the parties. In the case of this assumed transaction, SICL would merely be eliminating the late termination and liquidation lacuna risks and putting itself in exactly the same position it would have been in if it had received the Post-Administration Interest under deduction of UK WHT. From BLM’s perspective, it would have made a greater profit than it did as a result of the actual transaction. In both transactions (the actual and the assumed), BLM would make a profit, and we understand the FTT’s point to be that the making of a smaller profit (the actual transaction) could not be more objectionable than the making of a bigger profit (the assumed transaction).

Perhaps the FTT’s point was imperfectly expressed. We consider that it would have been better if the FTT had not engaged in speculation about what HMRC might, or might not, have done in relation to an assumed transaction. That is particularly so when the assumed transaction was, on the facts found by the FTT, most unlikely to have taken place. Nonetheless, the core point made by the FTT does not seem to involve any error of law. The FTT was simply testing the logic of HMRC’s case as they saw it.

In any event, we do not consider that the FTT’s having regard to the assumed transaction in the way in which it did affected in a material way its evaluative finding. Despite the way in which it expressed itself at [178] (which might appear to suggest that the reasoning for its view that BLM did not have a main purpose would be found only in [179] to [181]), we regard the core of the FTT’s reasoning to be found at [173] to [176], namely that the availability of Article 12(1) was merely part of the scenery.

HMRC’s third criticism of the Decision was that the FTT incorrectly placed “significant” reliance on the fact that HMRC had not sought to apply Article 12(5) in relation to any of BLM’s earlier purchases of LBIE claims. At [180] the FTT said that HMRC had “quite rightly” accepted that the other LBIE claims were not subject to Article 12(5) and that, having done so, HMRC must “logically accept” that the same must hold true for the SAAD Claim.

We agree with HMRC that the FTT was not in a position to come to any formal findings in relation to any of the earlier LBIE claims. Although there was some evidence in relation to those claims before the FTT, the FTT was not being asked to come to any decision in relation to any of them. Still less could it have come to a view on whether HMRC was right not to pursue any challenge in relation to any of the earlier LBIE claims.

We also agree with HMRC that, in any event, the tax treatment of the earlier LBIE claims could not, in and by itself, determine the outcome of this appeal.

However, it was open to the FTT to regard the prior transactions as relevant in the sense that they were part of the factual matrix in which the Assignment occurred (see [161]). The FTT’s point at [180], understood in the context of the Decision as a whole, was that BLM had acquired a great many other LBIE claims clearly expecting to benefit from Article 12(1) in circumstances where, as a matter of fact, they did then benefit from that provision. The FTT made at the end of [180] the same point about BLM taking account of Article 12(1) as part of the scenery as it had in relation to the SAAD Claim:

The FTT recognised at [181] that there were differences between the earlier LBIE claims and the SAAD Claim. However, it concluded that those differences did not mark out the SAAD Claim as exceptional:

We consider that the FTT was entitled to come to the view that it expressed at [181]. So far as BLM was concerned, UK tax was never an issue that concerned it. On the contrary, it was precisely because it considered that it could rely on its treaty rights that it could offer the price that it did for the Assignment. It is true that it was aware that SICL had a UK tax concern and that was why it wanted to assign the SAAD Claim but the FTT’s point was simply that, from BLM’s perspective, it regarded its beneficial ownership of the interest in respect of the SAAD Claim in the same way as it regarded its beneficial ownership of all the other interest in respect of all the other debt claims in the LBIE administration. That was a relevant matter. Its weight was for the FTT to determine.

The FTT’s core conclusion was that for BLM the existence of the UK-Ireland treaty was simply the setting in which the Assignment took place. The FTT could not find anything abusive in BLM, as an Irish resident company which beneficially owned the interest, taking the benefit of Article 12(1) of the UK-Ireland treaty. It was Ireland who had full taxing rights over the interest beneficially owned by BLM. BLM assumed that those taxing rights would be engaged. Accordingly, it approached the purchase of the SAAD Claim on that basis. That was a determination that was open to the FTT and cannot, in our view, be said to have been reached on a flawed basis.

None of the points raised in Ground 3 undermine the cogency of the FTT’s conclusions and we dismiss Ground 3 of HMRC’s appeal.

HMRC submitted that there were two specific errors of law in the FTT’s findings concerning SICL’s purpose.

The first error that HMRC assert was in relation to the proper analysis of Article 12(5) of the treaty and the extent to which SICL needed to have specifically identified Article 12(1) as the provision which it was seeking to take advantage of.

We accepted as part of our consideration of Ground 1 that, as a matter of the proper interpretation of Article 12(5) of the UK-Ireland treaty, there was no need for SICL to have been specifically aware of the relevant provision of the treaty. We do not consider, however, that this error of law on the part of the FTT affected its evaluative judgment to a material extent. Once they made their finding as to the law at [150], the FTT did not subsequently refer to the issue of specific identification at any stage of their detailed evaluation of SICL’s subjective purpose. That was because the FTT found that, as at the date the commercial deal was agreed (8 February 2018), SICL did not know anything about the identity of the purchaser. As such, it was not then relevant for the FTT to go further and consider the extent of SICL’s knowledge of the provisions of a treaty of which SICL was, so the FTT had found, unaware as at that date.

The second error, HMRC argued, was that, if specific identification of the treaty was required, the FTT had in fact correctly held that SICL had the requisite knowledge as at the Trade Date (12 February 2018). As part of this submission, HMRC also criticised the FTT for failing to have proper regard to events taking place after 8 February 2018 in determining the purpose SICL had when entering into the Assignment at the later date of 12 February 2018.

HMRC accept that SICL’s subjective intentions did not change from 8 February 2018 until the Trade Date. They nonetheless argue that, despite SICL’s finding out wholly for non-tax reasons (see [165(5)]) the identity of the purchaser and hence being able to infer the basis on which UK WHT was not an issue for BLM, the knowledge of SICL as at the Trade Date was decisive. That submission was advanced primarily on their interpretation of Article 12(5) of the UK-Ireland treaty, which we have rejected.

However, HMRC also submitted that, even if SICL’s conscious purposes did not change when it found out on the Trade Date that BLM was benefiting from Article 12(1) of the UK-Ireland treaty, its subconscious purposes did. We reject that submission. It represents, in our view, a disagreement with the FTT’s factual evaluation.

HMRC were free to submit to the FTT that SICL’s subjective purpose was altered when it found out that BLM was a resident in Ireland (following enquiries that SICL made for non-tax reasons). It was free to submit that this gave SICL a “subconscious motive” for being party to the Assignment by analogy with the cases of Vodafone Cellular Ltd and others v Shaw (Inspector of Taxes) [1997] STC 734, Mallalieu v Drummond (Inspector of Taxes) [1983] STC 665 and MacKinlay (Inspector of Taxes) v Arthur Young McClelland Moores & Co [1989] STC 898. However, the FTT was not bound to accept those submissions or find that there were two separate purposes, a conscious one and a subconscious one. The FTT had found that SICL did not care about (or even know about) Article 12(1) on 8 February 2018 and it did not care about it on 12 February 2018 either (when it did acquire the knowledge). The FTT was, in our view, entitled to conclude that SICL’s object or purpose in entering into the Assignment did not change from 8 February to 12 February 2018.

In addition, HMRC had four other criticisms of the way in which the FTT assessed SICL’s purpose in entering into the Assignment.

First, HMRC criticised the FTT’s analysis that SICL had the “sole purpose” of realising the SAAD Claim for the “best possible price” so as to realise a profit. The profit was, in HMRC’s view, solely attributable to the UK WHT arbitrage and both BLM and SICL knew that as at the Trade Date. We have considered this point in our rejection of Ground 2 of the appeal and have explained why, in the case of a treaty between the UK and Ireland which allocated sole taxing rights to Ireland in respect of interest beneficially owned by one of its residents, we consider HMRC’s focus on UK WHT to be misplaced.

Second, HMRC say that the FTT was wrong at [193(3)] to be concerned with the fact that the application of Article 12(5) would turn on whether the seller happens to be aware of the identity and tax residence of the purchaser. HMRC say that there is nothing unusual in an anti-avoidance provision turning on the knowledge of the parties to the transaction. We do not doubt that. But that was not the point that the FTT was making. At [193] the FTT was considering circumstances where a seller wanted to assign a debt for the highest price in circumstances where a market existed in which UK WHT would not represent a cost for those purchasers for a variety of reasons. In those circumstances, the FTT struggled to see why it would then be an abuse of the UK-Ireland treaty if the seller “happens to be aware” of the identity and tax residence of the purchaser, particularly as the interest would be taxable (but in Ireland rather than the UK). The FTT was entitled to reflect on these matters when reaching its multi-factorial evaluation. We do not consider that in so doing it employed flawed reasoning entitling us to interfere with the Decision.

Third, HMRC objected to what the FTT said at [195] about the impact of HMRC’s case on the secondary debt market, noting that there was no evidence to support that finding and there could be no possible objection to two contracting States reaching an agreement designed to deal with WHT arbitrage (whether UK WHT or Irish WHT).

We do not regard what the FTT said at [195] as making a factual finding about how the “secondary debt market” operates. The FTT was merely commenting on potential anomalies that might arise if HMRC’s analysis was correct. The FTT was, in our view, expressing a view that Article 12(5) does not apply in a case like the one before us. It was, in truth, just a different way of making the point it had already made at [193]. Again, we do not think that this can be regarded as a flaw in the FTT’s reasoning. Even if it could be so regarded, it was not, in our view, material to the conclusion reached by the FTT.

The fourth objection by HMRC was that there was no basis in the wording or purpose of Article 12(5) for regarding it as “aimed at” transactions involving conduits or treaty shopping ([197]) and that “something more” than the facts of the present case was required ([201]). HMRC also objected to the suggestion, at [200], that the “something more” might consist of circumstances where SICL had retained an economic interest in the interest and had indirectly accessed Article 12(1) through BLM, contending that this was inconsistent with the FTT’s earlier conclusion that there was no need for artificial steps or arrangements to exist before Article 12(5) was engaged.

We have dealt with these points in our discussion of Ground 1. As we explain above, it is clear from the OECD material that Article 12(5) was intended to catch transactions of the kind the FTT referred. Transactions involving conduit companies were a paradigm example and were mentioned specifically in OECD material. However, at [201], the FTT reiterated its earlier conclusion that Article 12(5) was not limited to artificial arrangements. It was not, therefore, saying that only “conduit arrangements” would be capable of engaging Article 12(5). Read as a whole, at [197] to [200], the FTT was reprising conclusions it had expressed earlier in the Decision and explaining why it did not consider the Assignment to be analogous to the arrangements described in the Conduit Report. We do not consider that discussion to involve any error of law.

Accordingly, we dismiss Ground 4 of HMRC’s appeal.

Finally, HMRC make an Edwards v Bairstow challenge that, looking at the Decision in the round, no reasonable tribunal could have reached the view that the FTT did in the light of the primary facts found.

We do not consider that the FTT fell into error in making the evaluative findings that it did. The conclusions reached are well within the range of views that a reasonable tribunal could come to.

Accordingly, we dismiss Ground 5 of HMRC’s appeal.

For the reasons given above, the appeal is dismissed.