S138 clearances

Euromoney Institutional Investor plc [2021] TC 08046

Key point – even if part of the scheme is blatant tax avoidance, the application must look at the scheme as a whole and not in bits

In brief a straightforward application for clearance that s137 should not prevent s135 from applying in respect of an arm’s length sale and purchase. However, the cash element was replaced with preference shares which were to be held for 12 months and then sold so that the vendor could obtain SSE. HMRC objected to this part and refused the clearance.

It was agreed that the exchange of shares formed part of arrangements but HMRC argued that the arrangements subject to the appeal were those under which the cash consideration originally agreed was replaced with preference shares in DTL. The Tribunal agreed with Euromoney that the correct interpretation of s. 137(1) required consideration of the entire exchange, not just the element relating to the preference shares and that the HL decision in IR Commrs v Brebner (1967) 43 TC 705 supported the view that the scheme or arrangement must be considered as a whole.

Was there a purpose of avoiding a tax liability and, if so, was it a main purpose?

On the basis that the appropriate arrangements to be considered were not restricted to the exchange of preference shares, the Tribunal then concluded that avoiding liability to tax was a purpose of those arrangements but not a main purpose. It was a purpose of the arrangements because the restructuring of the arrangements to substitute preference shares for cash had no other commercial purpose. (Euromoneyʼs argument that there was not a tax avoidance purpose because they were merely making use of a tax exemption (the SSE) intended to be made available by parliament was rejected).

The conclusion that it was not a main purpose was arrived at by taking into account witness evidence as to Euromoneyʼs subjective intention, the amount of the tax saving relevant to the transaction as a whole (less than 5% of total sale consideration) and the amount of time and effort invested in that aspect of negotiations (in particular the failure to investigate the potential downside risk (that the use of the preference shares could prejudice the treatment of the entire transaction) indicated its relative insignificance to Euromoney).